What’s The Estate Tax?

Parents work hard to provide for their children over the course of their lives and many individuals may be under the impression that their children will simply receive their inheritance when they pass; however, this isn’t always the case. Inheritance is often times not automatically passed down to one’s heirs upon death. Appropriate legal documents (such as a Last Will and Testament and/or trust documents) should be prepared by an experienced attorney to make sure someone’s assets are passed down to their heirs without incident. In order for parents to ensure that they pass as much of their estate on to their children as possible, it is important to understand a few key facts about the estate tax.

The Estate Tax is a Tax on Property

Many people do not understand what exactly is taxed in the estate tax. The estate tax is a tax on property, including cash, stocks, real estate, and other assets. Basically, anything of value can be included in the estate tax and the tax kicks in when the wealth is transferred from individuals who are deceased to their heirs. For example, when someone passes away, it is not just the value of their bank account that is taxed. Their property is valued and their stocks are assessed. These numbers are used to calculate a value for the estate. A tax is then calculated based on the total value of the estate.

The Estate Tax Does not Kick In Right Away

It is important for people to understand that the estate tax is not applied on the first dollar owned by the estate. The estate tax begins kicking in for every dollar over $5.49 million in the estate. This means that the estate tax is only going to be of interest or an issue to people who are wealthy; however, this does not mean that people should neglect their estate. Before people pass away, it is important to get the estate valued so that the estate planning can help avoid as much of the estate tax as possible. This will help ensure that the heirs receive the maximum amount of the inheritance that they can.

There is a Benefit for Married Couples

One of the key ways to minimize the amount of money that an estate owes in tax is to take advantage of the additional benefit for married couples. The estate tax will not start to tax the assets until the estate reaches $10.98 million for married couples. This is structured similarly to regular state and federal taxes. Couples filing jointly will benefit under the tax code when filing their taxes as opposed to couples who choose to file married but separately. This difference in the estate tax for married couples can play a significant role in the amount of inheritance that the heirs receive when the estate owners pass away.

These are only a few of the many important factors that play a role in determining the value of someone’s inheritance. Those who have questions should contact an experienced estate planning attorney to learn more about how estate planning can minimize the value lost in taxes.

One should always consult with an experienced professional who can provide insight on how to structure an estate and how to best be prepared for the estate tax. Being made aware that an estate can be taxed and knowing the specifics of such a tax is only the first step. Upon knowing that information, parties can then make decisions relating to the estate on how to minimize that tax. Older couples may consider the estate tax and the benefit to married couples if and when they contemplate divorce. If an estate is large enough, couples may choose to stay married as a way to protect their assets. One should consult with an experienced family attorney if they are considering remaining married as a way to preserve their estate and finances.

Article updated October 8, 2020.