Estate planning forces us to consider some uncomfortable topics, but many people would never dream that they will continue to pay taxes after death! Unfortunately, that’s exactly what happens sometimes (or more correctly, it’s your heirs who will pay the taxes). But because you would prefer to leave your estate to your loved ones, and not to Uncle Sam, estate planning becomes an important part of financial planning. This is true at any age, but especially as we transition into retirement.
Also called the “death tax”, the estate tax was first created by the Stamp Tax of 1797. As you might imagine, the tax has been quite unpopular throughout our legal history. It has been repealed and reinstated throughout the years, often in response to political pressures or as a bargaining chip attached to other Congressional actions.
Currently, we are subject to estate taxes, as created by 1916’s Revenue Act. But every few years, the tax is changed somewhat, often with regard to exemption amounts. For 2019, the IRS bumped the estate tax exemption to $11.4 million for an individual, or $22.8 million for couples. That means the first 11.8 million of an inheritance can be shielded from taxes, or couples together can shield up to $22.8 million. But once an inheritance exceeds those amounts, the entire estate is taxed at a rate of 40 percent.
Granted, a relatively small proportion of the population will ever have to worry about this type of tax. But it is important to remember that “estate” does not refer only to the cash value of financial accounts. Real property, stocks and bonds, and pretty much anything else that you pass on to your loved ones is considered part of your estate, and therefore your estate plan.
Theoretically, one could assume that their estate planning does not need to account for estate taxes. But then, upon their death twelve years later, certain assets have increased in value dramatically, and the estate is taxed. This could be a problem for those with considerable non-cash assets, because heirs could be forced to come up with some way to pay the taxes on the estate.
Even if your estate is not subject to estate taxes, consider other forms of taxes that might apply. For example, if you leave a real estate property to a loved one, can they afford the annual taxes? Estate planning can help you ask these questions, and answer them in a way that benefits you and your heirs.
As you continue to plan for your financial future, remember that estate planning is part of the complete package. Talk to us about your concerns at our next meeting, and then meet with an estate planning professional to learn methods of protecting your property and passing it to the individuals of your choice.