Nothing is certain but death and taxes.
And some taxes are due even after you die.
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Your estate
is the total value of all your savings and retirement accounts, your home, and any other
assets, minus
your debts and the cost of settling your estate. Most states impose a tax on estates over a certain value,
and the federal government has historically taxed large estates as well. For 2020, you can leave an estate
worth up to $11.58 million free of federal estate taxes. The maximum tax rate on amounts over $23.16 million is 40%.
In 2020, the value of a tax-free estate and the amount you can give away as taxable gifts are combined. The
any taxable gifts would be subtracted from $11.58 million to determine the size of the estate you can leave tax free.
In future years, the exclusion amount will increase to reflect increases in inflation. In addition, if one spouse of a married couple dies, any part of the exclusion that he or she didn't
use can increase the amount the surviving spouse can leave tax-free. For example, if a wife died in 2020 and
left her entire $11.58 million estate to her husband, using up none of her exclusion, the husband could leave an
estate worth $23.16 million provided all the paperwork had been handled correctly.
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CALCULATING YOUR NET WORTH It
pays to compute your approximate net worth
while you're still alive. You may be surprised to find that the value of your possessions, minus mortgages and other debts, has climbed above the tax-exempt amount.
Be sure to include the amount you have built up in retirement plans, and an accurate assessment of the market value of
your home and your equity in it.
Other assets to consider are the face value of your life insurance policies, which could put you over the taxable
threshold, and any inheritance you anticipate.
If your estate is over the taxable amount or seems likely to top that number, you
need an expert tax adviser and a lawyer who specializes in wills and estates. It
pays to review your will and estate plan periodically, especially if the value of
your assets, the make-up of your family, your wishes for sharing your assets, or
the tax laws change, or you move from one state to another.
The value of your property, such as your home, stocks, and bonds is figured at
the fair market value
on the date of your death or six months after—not at what you paid for the property.
Your executor
picks the valuation date. Using the current market value may raise the value of
your estate, but it also means that, in most cases, neither your estate nor your
heirs will pay capital gains tax on any increased value of the property that occurred before your death.
Under current law, property you leave
to beneficiaries in your
will passes to them at current market value, or what's known as
a step up in basis.
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GIFT TAXES You can avoid estate
and gift taxes on annual gifts of up to $15,000 each to as many people as you like.
So can your spouse. For example, a couple with three children may give each child
$30,000 a year and reduce a potentially taxable estate by $90,000 annually.
In addition to the $15,000 you can give to individuals, you can pay unlimited tuition
or medical expenses for anyone—a grandchild, perhaps—without being subject
to gift tax. But you must pay the hospital, doctor, or college directly. You can't
give the money to the patient or the student without incurring potential gift taxes.
You can make taxable gifts during your lifetime, and no tax is actually due until
the accumulated value of the gifts reaches your lifetime cap. Then you owe tax at
the same rate that applies to taxable estates. Unless Congress changes the law,
the top rate is 40%.
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THE MARITAL DEDUCTION While you're
alive, you may make unlimited tax-free gifts to your spouse. When you die, you can
leave your entire estate to your spouse free of estate tax - provided, in both cases,
that he or she is a US citizen. Your spouse's estate will be taxed at his or
her death at whatever rate applies at that time.
If your spouse is not a US citizen, your tax-free gifts are limited to $157,000 a year in
2020, an amount that typically increases slightly from year to year. You probably should consider
establishing a qualified
domestic trust to soften the tax blow and make it easier to share assets. If you're
not married but have a domestic partner, you'll want to work with an experienced tax or
legal adviser to find the most efficient solutions for gifting assets or leaving an estate.
If a wife and husband own property, such as a home, as joint tenants with the right
of survivorship, only half the value is included in the estate of the first to die.
If joint tenants aren't married to each other, the entire value of the property
is usually included in the estate of the first to die. The estate's representatives
can reduce the potential estate tax by proving that the survivor paid for all or
part of the property or received a share of it by gift or inheritance.
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