Estate tax is unavoidable in most circumstances and if you are about to get bust with your estate planning, then you will need to know what your obligations are in relation to tax.
You will also need to keep up with current events as there could be changes which affect the paying of taxes on estates.
In this article, we will look at estate tax and what it is and some of the other terms such as gift tax which can affect you when leaving property and cash as part of your estate will.
What Is Estate Tax?
In a nutshell, estate tax is the tax that is charged on the portion of an estate that is dispersed on behalf of someone who has passed away. If the estate is transferred through a will, trust, property, insurance or cash means, that transfer is subject to estate tax.
When we last checked, an estate tax rate is levy on assets worth more than $1 million dollars but you may need to check to make sure the limit hasn’t changed. For the ultra wealthy, unfortunately there may be no way to avoid it completely other than receiving an estate tax exemption.
But, there is a way to avoid having to pay estate tax for people who are on or just above the seven figure mark and that is to keep your asset and cash value below the million dollar limit.
One way to make sure you don’t exceed it is to make what are known as lifetime gifts but then again, you are entering another phase of tax area known as gift tax.
Gift Tax
If you transfer property or cash and don’t receive anything in return then you could be subject to gift tax. People get confused when they say that the property or cash transfer is not a gift but the law interprets this a different way. You will likely be required to pay a gift tax.
Gift is determined if you make a transfer or give something of value to someone else but there is nothing required back to you. If this is the case then you could be deemed as making a gift transfer where a tax will be imposed.
Yes, it sounds unfair and you really should check with an estate planning attorney if you are not sure. You also need to check if there is a certain value limit you reach when making a transfer that needs to be reached before it is deemed as being a gift.
Inheritance Tax
Many people confuse estate tax and inheritance tax. While there are some things similar with the two, the fact remains they are different entities and again, checking with an attorney makes good sense when trying to understand the difference between the two.
Inheritance tax is also referred to as death tax and a big income earner for governments. Many people despise this tax and say it is unfair because it is basically penalizing the immediate family of someone who has passed away with unnecessary tax burdens. Many say it’s immoral.
Whatever your thoughts are on inheritance tax, the fact remains it’s required to be paid in many instances through state and federal laws and avoiding it could cost you even more. So in a nutshell, inheritance tax is tax paid by an individual on cash or property received from a deceased person.
So in effect, by simply inheriting something you are eligible to a pay a tax. Unfair? Sure but by checking with an attorney could mean there are exemptions that apply to you which could reduce the tax paid.
It’s said there are two certain things in life; death and taxes. Looks like they are right.