People are rightfully afraid of estate tax – sometimes called “death taxes.” The tax rate on estates (simplifying the technicalities a little) is 40%. So people imagine that leaving a $300,000 house to their heirs could result in a $120,000 tax bill – maybe requiring their spouse or children to sell the house to pay the taxes. But this is not really the case.
The fact is that the first $5.6 million of your whole estate is tax-free ($11.2 million for married couples). Not too many people leave estates large enough to trigger a tax. While this is one the first questions we ask our clients – we want to make sure to minimize the tax consequences of their estate plan – many of our clients are not even close to this amount.
The most important consideration in planning your estate is usually not taxes, but the cost, time and convenience of actually distributing your estate to your loved ones.
That said, if you do have a possible estate tax liability, there are solutions, but they depend very much on the specific details of your estate and your desires for how to distribute it upon your death. One of the more common strategies is to take advantage of the annual gift exclusions, which effectively increase your estate tax exclusion.
To put it in simple terms, each year you are allowed to give a certain amount to as many people as you like, tax free. This year, that amount is about $15,000 (it changes a little each year, usually going up). So, if you gave $15,000 to each of your spouse and three kids each year for ten years, $600,00 of your estate would have passed to your heirs without triggering any tax consequences. There are, of course, various considerations to even this strategy, but you can see that there are tax planning options.
If you believe you might be in danger of paying death taxes, you should see a professional trust and estate planning attorney to explore your options.
