In the past, those inheriting large estates often faced severe taxation. These situations often prompted wealthier individuals to pursue some complicated, creative estate planning maneuvers aimed at avoiding the bulk of these taxes. Now, with the changes to the tax code recently enacted by Congress, we will be seeing some changes to the estate tax. You might have heard that it has been eliminated, but hold off on celebrating for now. That’s not one hundred percent accurate.
Previously, your heirs would have owed taxes on any inherited amounts (including the value of property) over 5.49 million dollars. That amount essentially doubled to 10.98 million for married couples. That threshold will now double, to nearly 11 million for individuals and nearly 22 million for married couples, from 2018 through 2025.
If your estate exceeds those values, and you pass away between 2018 and 2025, your heirs would owe taxes on the amount inherited over 11 million dollars (or 22 million, as the case may be). The estate tax is calculated using brackets, with rates starting at about 17 percent and rising rapidly to top out at 40 percent for the higher brackets.
If the total value of your estate falls below those thresholds, you might assume that you don’t have to worry about your heirs paying estate taxes. However, this isn’t true for two reasons:
- Over time, the value of certain property and assets can increase, which you already know. So those of you who are close to the threshold still need to make a plan to deal with estate taxes, even if your total worth is currently under the limit.
- These new rules regarding estate taxes are set to expire in 2025, and we have no way to predict whether the provisions will be extended or changed in the future. Don’t let 2025 sneak up on you without planning for any new rules that might be in place by that time!
As always, stay in touch with us regarding your net worth, estate planning, and more. We can help you make plans to avoid excessive taxation when possible, particularly regarding the estate tax.