When you pass away, you will likely wish to pass your possessions on to your heirs. Surprisingly, such transactions are taxed by the federal government. This tax is called the legacy tax, or estate tax, and it is levied on the privilege of passing titles by will to property.
If you want to learn more about legacy taxes, continue reading.
The government levies the estate tax on your right to transfer property at death. Whether you are subject to estate taxes depends on where you lived and how much you were worth. Though, in reality, the majority of estates are too small to be charged a federal estate tax. As of 2022, the federal estate tax only applies if the assets of a deceased person are worth more than $12.06 million or more. Though, some states tax estates at much lower thresholds.
Estate taxes are calculated based on the fair market value of the deceased’s assets. The process consists of an accounting of everything the deceased owned or had interests in at their time of death. Because the fair market value is used, the value won’t be based on what you paid for them or what their value was when you acquired those assets. The total value of your assets is called your Gross Estate. It may consist of cash, securities, real estate, insurance, trusts, annuities, business assets, and other assets.
Once the gross estate is calculated, certain deductions are calculated to bring you to your taxable estate. Deductions may include mortgages and other debts, estate administration expenses, and property that was passed to surviving spouses or charities. Once your taxable estate is computed, the value of lifetime taxable gifts is added to the number as well. The tax is then reduced by any available unified credits.
One way to avoid legacy taxes is to purchase life insurance. It’s an effective way to provide funds to your heirs without them being subjected to estate taxes. This is because life insurance death benefits are not taxed.
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If you haven’t planned your estate, you don’t have a plan in place to minimize estate taxes. By working with a financial planner, you can ensure that your assets are passed on at the minimal tax rate. If you want to learn more about this process, contact American Family Solutions.