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Estate or Inheritance Taxes

Estate taxes, also known as inheritance taxes, are taxes levied on the transfer of property from one generation to the next upon the death of an individual. Estate taxes are imposed by the federal government and some states, and they significantly reduce the value of an estate that is being passed on to the next generation. The federal estate tax applies to estates with a value that exceeds the exemption amount, which for 2023 is $12.92 million per individual. This means that estates valued at less than $12.92 million are not subject to the federal estate tax. Estates in excess of 12.92 million will pay about 40% to estate taxes on the excess. The estate tax rate varies depending on the size of the estate, but climbs up to a maximum rate of 40% quickly. In addition to the federal estate tax, some states also impose their own estate taxes. The rules and exemptions for state estate taxes vary widely, so it's important to familiarize yourself with the rules in your state. Estate taxes can erode the amount of wealth that will pass on to your heirs, as 40% of your net worth will go to estate taxes. To minimize the impact of estate taxes, there are several strategies that individuals can use, including:

  1. Giving gifts to your family and relatives during your lifetime: By making gifts during your lifetime, you can reduce the value of your estate and minimize the impact of estate taxes during your lifetime.

  2. Creating a trust: Trusts can be used to hold assets and manage them for the benefit of the beneficiaries. There are several types of trusts that can be used for estate planning, including GRAT trusts, bypass trusts, various irrevocable trusts, and a variety of other trusts.

  3. Transitioning business ownership to your family during your lifetime, utilizing market valuation that is more favorable because of limited marketability of small businesses.

  4. Purchasing life insurance: Life insurance can provide a source of funds to pay estate taxes and other expenses, allowing the remaining assets to be passed on to the next generation.

  5. Estate tax planning with a qualified CPA: An experienced estate tax planning CPA can help you create an estate plan that minimizes the impact of estate taxes and protects your assets for your beneficiaries.

It's important to note that estate taxes are complex and subject to change, so it's prudent to work with a qualified professional to ensure that your estate tax plan is up-to-date and in compliance with the latest laws and regulations.

In conclusion, estate taxes are taxes levied on the transfer of property from one generation to the next. Estate taxes can significantly reduce the value of an estate, so it's important to be familiar with the rules and exemptions in your state, and to consider strategies such gifting during your lifetime, creating relevant trusts, purchasing life insurance, estate tax planning, and business ownership strategies with a qualified CPA to minimize the impact of estate taxes on your estate.

Taxes are your largest annual expense, but effective and consistent tax planning can reduce it significantly. A complimentary call to discuss your tax circumstances and our approach to planning via Calendly will be helpful.


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