You’ve worked hard your entire life, and now you want to be sure that your family will be taken care of after you’re gone. You’ve built wealth, but you’re worried about “death taxes,” which could substantially reduce the value of the wealth you will pass to your beneficiaries. Consider these tips to protect your beneficiaries’ inheritance.
Know the difference between inheritance tax and estate tax.
An inheritance tax is a tax based on one’s right to inherit the estate. An estate tax is a tax based upon the value of the estate at death. The federal government imposes an estate tax but no inheritance tax. The State of Florida does not impose either of these taxes.
Some states may charge estate and inheritance taxes. Be certain to seek advice from your attorney or tax preparer to understand which taxes may apply in your state of residence.
Know when to worry.
As of 2014, your assets would be subject to the federal estate tax only if their value at death exceeded $5.34 million. If the total value of your assets is lower than that, you have no cause to worry. (Check your state’s individual regulations regarding any estate tax that may be levied by the state.)
Apply proper tax credits.
The federal unified credit allows you to exempt a portion of your wealth from federal estate tax. In 2014 that amount was $5.34 million. You would pay estate taxes only on the assets in excess of that number. If your wealth is less than $5.34 million, the unused portion of your unified credit can be used by your surviving spouse [at their death] in addition to their own unified credit.
Know who will receive certain assets.
If you own assets jointly with others [such as a checking or savings account], the joint owner[s] will take possession of those assets following your death. Some assets have named beneficiaries that identify who will own them following your death. Examples include life insurance and annuity policies, pension benefits and retirement accounts such as an IRA or 401(K) plan.
Assess property on the alternate valuation date.
The valuation upon which potential estate taxes are calculated are based upon the value of your assets at death. Sometimes following death there remain secured debts that become an obligation of your Estate. When this occurs the value of your estate will be reduced after your death. Your beneficiaries need to be aware that they have the option of extending that valuation date up to six months. In this way, the beneficiary can save money on taxes as the value of the estate will have gone down since the date of death.
Gift assets during your lifetime.
After having determined your beneficiaries, you may wish to consider gifting portions of their inheritance during your life. Not only might you reduce your estate taxes but you will also have the pleasure of seeing your gifts being enjoyed. Currently you may gift up to $14,000 per year to any individual (or $28,000 if you are married couple), with no tax liability.
Awareness of these tips may help to ensure that your family will receive maximum benefit of your financial legacy.
