What Are Estate Taxes?
Counsel from a Sonoma County estate planning lawyer
When a person who owns property or other assets dies, the federal government—and some state governments—impose an estate tax on the value of the property. Estate tax laws change constantly, therefore it can be extremely beneficial to speak to a knowledgeable California estate tax attorney when you are in the process of creating an estate plan. There is good news regarding estate taxes, however. Speaking on the federal level, estate tax does not generally affect very many American taxpayers—typically only those in the top two percent of the nation’s wealthiest.
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For federal estate tax purposes, the calculations begin with the “gross estate,” which includes the fair market value of all property owned by the deceased, including life insurance and annuity proceeds. There are a limited number of deductions allowed which can reduce the value of the gross estate, such as funeral expenses, outstanding debt, state death taxes and property which transfers to a surviving spouse.
There is even better news for California residents. California is one of 38 states in the U.S. which does not impose an estate tax. The federal estate tax rate is currently 40 percent, but there is an estate tax exemption available. Having a knowledgeable estate tax attorney from the Gullotta Law Group examine your assets when creating an estate plan can help minimize—or even eliminate—the amount of federal estate tax you would owe upon your death.
Are Estate Taxes and Inheritance Taxes the Same?
Although the terms “estate tax” and “inheritance tax” are often used interchangeably, they are different primarily because of who pays the tax. Twelve states and the District of Columbia currently collect an estate tax, and the federal government imposes an estate tax—but no inheritance tax. Only six states collect inheritance tax, with Maryland collecting both an estate tax and an inheritance tax. Estate taxes are calculated on the gross or net value of any property owned by the deceased as of the date of the death. The liabilities of the estate are subtracted from the overall value of the estate to arrive at the net taxable estate.
An inheritance tax is paid by the person who receives property from the decedent—unless the will or trust provides that the estate will pay the inheritance taxes. In the six states which collect inheritance tax, surviving spouses are exempt, however in two states, surviving children and grandchildren must pay inheritance tax. “Collateral” heirs, such as friends, nieces, nephews, sisters or brothers must pay inheritance tax in those states which collect it. California residents will be be happy to know that the state of California collects neither estate tax nor inheritance tax. Even so, there may be many ways an experienced Sonoma estate planning attorney can help minimize all sorts of taxes upon your death.
What Property is Included in Federal Estate Taxes?
Your taxable estate will be determined by the assets you have at the time of your death—no matter where those assets are. The IRS will tally your gross estate which includes property owned by you, and the property which passes outside of probate upon your death. This can include your home, any business interests, personal property, death benefits from life insurance, retirement plans, art and jewelry, real estate, bank accounts, investments, stock options, deferred compensation, half of your community property, cash, mortgages, jointly owned assets IRAs and 401(k)s. Your liabilities (loans, funeral expenses, debts, charitable contributions and administration and legal costs as well as assets which pass outright to a surviving spouse) will be deducted from your estate. The balance is considered your taxable estate.
What Deductions Exist for Reducing Federal Estate Taxes?
Federal estate tax exemption allows an estate with a value which is currently below the exemption amount to pass on with no estate taxes charged. The exemption amount as of 2022 is $22.06 million. The surviving spouse can use any portion of that $22.06 million exemption which is not used upon the death of the first spouse. Estates which exceed the $22.06 million exemption must pay an estate tax of 40 percent of the excess amount. Essentially, married couples have a “lifetime credit” of $22.06 million which is protected from federal estate taxes.
You can also avoid federal estate taxes by transferring property to heirs while you are alive, rather than having them inherit the property after your death. These types of gifts can reduce the total amount of your estate, thus reducing the amount of taxes imposed on your estate after your death. As an example, a grandparent can gift grandchildren up to $15,000 per year (or $30,000 if spouses combine gifts) without incurring a gift tax. This amount can be given as an outright cash gift, or educational expenses or healthcare expenses can be paid. The money could also be placed in a trust or a custodial account on behalf of the grandchild.
How the Gullotta Law Group Can Help
If you have questions regarding estate taxes, the Gullotta Law Group can help. Although California has no estate tax or inheritance tax, retirement accounts and pension plans are taxed, plus California income taxes are high, with an additional one percent surtax on all income over $1 million. Overall, California has the highest state marginal tax rate in the United States, although property taxes in the state are the 15th lowest across the nation.
All of these types of taxes could be important once you start estate planning. Your estate planning lawyer from the Gullotta Law Group will ask you questions regarding your financial situation and your preferences, then will use this information to determine the estate plan for you. All of your wishes will be taken into consideration, and you will have a highly qualified, highly knowledgeable professional helping you plan for the future. If you are ready to begin Sonoma estate planning, contact the Gullotta Law Group today—we can help you determine what you need in your estate plan, and the way to accomplish your goals.