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While you may not sleep in a gated mansion at the top of a hill, you might be surprised to find out that you most likely own an estate—at least when it comes to inheritance. It could be in the form of a home or it could be as simple as your car or furniture collection—it might even be a life insurance policy. All of these items qualify you as being the owner of an estate, which means these belongings are subject to estate taxes.
Ultimately, you need to have a plan in place that takes into consideration any taxes that might be owed by your estate in the event of your passing. It’s not the most comfortable thing to think about, but planning ahead can actually help to alleviate anxieties related to estate taxes, and it’s certainly the most responsible path to take.
Here are just a few things you need to know about estate taxes and how they might apply to you and your family.
1. Estate Taxes Aren’t Based on Income
No one wants to think of the inevitable, but doing so is crucial for understanding estate taxes. The IRS allows transfer of property in the case that the owner dies, which takes into consideration everything from real estate, vehicles, and insurance to cash and stocks. Once the fair market value for these items has been determined (hint: it’s not likely to be what you paid for them), you will end up with a number that represents your gross estate.
Deduct from your gross estate taxable items such as mortgages, funeral expenses, and more, and you’ll be closer to what the estate tax liabilities will be. A federal tax return must be filed by the estate’s executor within nine months of your passing before a finalized estate tax amount can be determined.
2. Estate Taxes Typically Apply to the Wealthy
The good news about the “death tax,” as it’s often referred to, is that it might not apply to you whatsoever. For those who pass away in 2017, a tax on transferring an estate must only be paid if the estate is worth $5.49 million or more. This number has increased significantly since 2001, when estate taxes applied to any estate worth $650,000 or more. Bear in mind, however, that a spouse’s combined wages can factor into estate taxes, which certainly would’ve played a bigger role 10 plus years ago than it does today.
3. Planning Plays a Crucial Role in Avoiding Estate Taxes
If you’re a middle-income earner, you might think at this point that you’re fully exempt from estate taxes—but not necessarily. Any families who have assets in the $750,000 or more range can get a lot of mileage out of estate planning due to the fact that value and inflation can easily shift with time. Remember that estate planning typically means preparing for an event that will happen 20-30 or more years into the future, and a lot can change with both the economy and exemption law in that time. Putting off the planning process isn’t only unwise—it can be dangerous to the health of your estate.
Anyone who has an estate to care for owes it to themselves and their heirs to work with a financial advisor on estate planning logistics. With the help of an expert, you can ensure a bright future for your estate and curtail any unnecessary taxes that might apply.