If you are getting ready to plan your estate, you may have heard about how it is very rare that your loved ones will need to pay taxes on what you leave behind for them. You may actually fall into the small percentage of people that have a large enough estate where taxes need to be paid, and it would be helpful to know what those limits are that determines the risk of taxation.
Federal Inheritance Tax Limit
The IRS has increased the limit that required heirs to pay estate taxes to $5.43 million for the 2015 tax year. The way it works is that any assets in your estate beyond the $5.43 million valuation will be taxed at a rate of 40%. Thankfully, no federal taxes will need to be paid on any assets up to that federal limit.
Lowering Your Estate's Value
If you do have an estate worth more than $5.43 million, there are methods to lower the value of the estate in a way that prevents taxes from being owed. There are gift exemptions where individuals can receive up to $14,000 a year tax-free.
It would take some years of planning, but it would be possible to gradually give your money away so that Uncle Sam does not take any of it upon your death.
State Inheritance Tax Limits
You should be aware that there are state inheritance taxes that may come into play, even if your estate falls beneath the $5.43 million federal limit. There are 8 states that have their own laws regarding inheritance taxes. They are:
- New Jersey
Each state has their own laws regarding the taxation if a recipient crosses a certain threshold. For example, Indiana classifies heirs into three classes.
- Class A – $100,000 exemption - Parents, grandparents, children, and grandchildren
- Class B – $500 exemption - Brothers, sisters, and their lineal descendants
- Class C – $100 exemption - Everyone else
If you left $125,000 to a child, then they would only need to pay taxes on the $25,000 that is over their exemption limit. Leaving $125,000 to a brother or sister would require them to pay taxes on $124,500. The difference can be quite startling depending on the relationship, which is why people try to utilize that $14,000 per year gift exemption while they can.
The best way to avoid having your heirs get taxed is by working with an estate planning attorney. They can help limit taxation by helping you set up living trusts, joint accounts, or assign joint ownership of valuable assets that you wish to pass on. For more information, contact a professional like those at Brandt & Beeson PC.