Planning for your future can be a very overwhelming thing. Estate planning comes with a lot of decisions that not only are difficult to make but can also be very confusing. Additionally, when your spouse, family, or friends receive your assets, you don’t want them to be overwhelmed and end up having to deal with even more work. Or worse, be left to pay taxes. The reality is some estates could be subject to various taxes. Some estates may not be affected by this. Taxes usually apply to large estates in which the gross value of the estate is over a certain threshold. This threshold also usually increases year after year. Knowing what the value of your estate is now will help you and an estate planning attorney determine what the value of your estate will be in the future. This information will help you decide on how you will need to plan so you can help your loved ones avoid tax payments in the future.
What Taxes Can Be Applied to Estates and Inheritances?
There are three main taxes that could be applied to an estate and the inheritance that you want to pass to your loved ones: Capital Gains, Estate Tax, and Inheritance Tax. Each of these different types of taxes affect different parts of an estate. Below is a more in-depth explanation to help you understand the importance of each.
Capital Gains
This is a federally regulated tax that is based on the sale of an asset. A few examples of these assets would be your home, shares of stock, or a vehicle. This is based on the amount of the value of that item and not the amount of which you originally purchased it. This tax is applied when one of a beneficiaries decides to sell any assets that they have inherited.
Estate
Estate tax is a tax on your right to transfer property after your death. To find what this number is, after your death everything your own will be accounted for. The amount for these assets is based on current market value, not the amount to initially paid when you acquired them. These items include cash, real estate, trusts, insurance, business interests, annuities, and any other assets you own. This will give you your Gross Estate Value. Once that is calculated, your personal deductions will be calculated. These deductions come from mortgages, administration fees, charitable donations you planned for, and any other debt you may have carried. Estate tax may only be required if an estate goes beyond what the IRS has defined as the threshold for the year of your death. For instance, in 2023 the threshold in which estate tax was required was over $12,920,000. In 2024, that threshold was raised to $13,610,000. If an estate is over this threshold, you will be required to file for estate taxes. The larger an estate is, the higher the tax rate will be. These taxes can range from 18% to 40%.
Inheritance
Inheritance tax is applied to the recipient of the inheritance and not the estate itself. This is not regulated at a federal level, only at the state level. Ohio is one of the states that do not require an inheritance tax.
What Is the Federal Unified Tax Credit?
The federal unified tax credit is an amount that you are able to give a beneficiary without being subject to federal gift, estate, or transfer taxes. Every year, federal estate taxes allow a certain amount of an estate to be passed to your beneficiaries tax-free. Every year this amount changes. In 2024, the exemption amount is 13.6 million per individual. Using this exemption allows you to reduce your estate taxes and helps beneficiaries get the most out of what you are leaving to them. The unified tax credit is one of the biggest ways you and your heirs can avoid paying a lot of taxes.
How Can You and Your Heirs Avoid Inheritance Fees?
Now that you understand the primary taxes that you and inheriting heirs may face after your death, you can start to understand how to avoid these taxes. Below are a few ways you and an estate lawyer can minimize taxes with an estate plan.
Have A Gifting Strategy
If you have a large estate and plan to pass it down to your family and friends, you can come up with a gifting strategy that will help you and them avoid paying taxes. The 2024 gift tax limit is $18,000 per person. This is the maximum amount that you can give a single person without having to report it to the IRS.
Setting Up Individual Trusts
Setting up trusts for beneficiaries can help everyone avoid paying taxes when you pass away. In Ohio, you are able to make an irrevocable trust for a beneficiary. These trusts cannot be modified or terminated during the grantor’s lifetime without the permission of all the heirs. When you make an irrevocable trust, you are giving up control and ownership of the assets that the trust contains. When you pass away, the contents of the trust will transfer all assets to ownership of the trust beneficiaries. Since you have given up ownership and control of the assets in the trust, heirs aren’t subject to estate or inheritance taxes when you pass away. Setting up a trust can also help an estate avoid probate.
Retirement Account Inheritance Planning
Having a plan for your retirement accounts can also reduce the amount of taxes that you and beneficiaries will have to face. Pre-tax retirement accounts face an income tax which can be a huge burden when you go to withdraw money. To avoid paying higher taxes when you distribute the funds or when a beneficiary inherits these accounts, you can utilize a Roth IRA. Money that is in a Roth IRA is pre-taxed. When you withdraw funds out of this account, assuming you are at least 59 1/2 years old, you are not subject to income taxes. The money in your 401K is not taxed. When you go to withdraw funds from your 401K, you will need to pay whatever the tax rate is at that time on the money you are withdrawing. You are able to move money from your 401K into your Roth IRA, but you will need to pay the taxes on this transfer. If you start to move your 401K money into a Roth IRA, you will pay the tax percentage that are current at the time for transfer. We can only assume that these tax percentages will continue to rise. If you wait to transfer these funds over later in your life, you run the risk of paying a higher tax percentage. When beneficiaries inherit your retirement accounts they will have to pay taxes on the funds from your 401K, but do not have to pay taxes on the money from your Roth IRA.
Inheriting An Estate Can Be Costly!
Want To Make a Charitable Donation?
If you are wanting to donate part of your estate to a charity, you can reduce the size of your taxable estate. Before an estate is divided among inheriting heirs, your charitable donations are taken out which will lower the overall amount of the estate. The amount of estate that is left after the charitable donations are deducted would then go through the process of estate taxes.
Are you a beneficiary who needs help understanding an Inheritance or a trust?
Has a close relative or friend passed away and named you a beneficiary for part of their estate? Understanding the taxes that may come with an estate that you are receiving can be confusing. Having an estate attorney will help ease stress and make sure you are aware of all taxes you may incur if you accept the inheriting estate. Contact Taneff Law today to get in touch with one of our counselors. We will be able to guide you through all the steps to ensure you are getting the most out of your inheritance.
Start Planning for the Future Today!
There are many ways for you to reduce taxes for yourself and your heirs. The best thing that you can do is to contact an estate planning attorney who can help you make a well-organized plan for your estate. Working with an estate planning counselor will allow you to make educated decisions regarding your belongings and keep you stress-free while planning for your and your family’s future. An estate planning counselor will be able to answer any questions you may have and further explain these topics on a deeper level. Taxes vary from state to state, and it is important to be sure you are setting yourself and your family up for success. Your counselor will also help you understand situations that are only specific to your estate and give you all the options that are available to you to help minimize tax liabilities.
Call Taneff Law Today to Meet with An Attorney!
Start your estate plan today! We will help with minimizing estate tax and assist you with any tax planning for an estate. We will view your estate and show you current rates so you can make the best decision for your estate planning.