Will my family have to pay estate tax when I die? This is an extremely common question that we are asked. The last thing you want your loved ones to have to worry about when you die is paying taxes on anything you have left to them. Most people will never have to worry about estate tax because their estate is worth less than the exemption amount. It is important however, to understand what the tax is all about and if you qualify for the exemption.
What Is It?
Estate tax is a tax on your right to transfer property at your death. Everything you owned at the time of your death is included in your estate. This could include real estate, trusts, securities, cash, business interests, insurance, and so on. The current fair market value of all of these things constitutes the value of your estate.
Reducing Your Gross Estate
After adding up everything in your estate, there are several deductions that can be applied. Some of the most common deductions include: mortgages, funeral expenses, estate administration fees, property passing to a surviving spouse or to a qualified charity. There are other ways to reduce your gross estate which include: lifetime gifts to children and grandchildren and/or the creation of either an irrevocable life insurance trust or a QTIP trust.
Estate Tax Exclusion Rate
The exclusion rate allows a person certain amount of property to be passed on to their heir’s tax free. The rate is indexed for inflation and usually increases each year however, some years there have been no exclusions. If your estate is less that the exclusion amount then no tax will be owed on your estate. The exclusion amount must be reduced by the amount of taxable gifts you have given in your lifetime.
It is important to pay attention to the current exclusion rates if you have a large estate. With proper planning, your loved ones will be sure to receive the most out of your estate when you pass.