How Taxes Affect Estate Planning

Nothing is certain in life other than death and taxes. What is the impact of taxes on estate planning? In 2022, the federal estate tax exemption is $12.06 million per person. If the value of your estate is under this threshold, then your estate will not be subject to tax. Those with estates totaling more than the threshold amount can be subject to a 40 percent tax on the estate’s value over the federal estate tax exemption.

There are three federal estate planning taxes to be aware of–estate taxes, gift taxes, and generation-skipping transfer taxes.

Estate Taxes

The federal government charges a transfer tax on the value of the cash, securities, and other property transferred to your beneficiaries at your death. As noted above, the 40 percent tax begins on any amount in excess of the federal estate tax exemption.  Assets inherited by a spouse are not subject to the estate tax because of an unlimited marital deduction.

Gift Taxes

The federal government also imposes a transfer tax on the value of the property transferred as a gift during your lifetime.

In 2022, the annual exclusion amount is $16,000 per person, per year, or $32,000 for a married couple to any one person. There is no limit to the number of recipients who can receive the annual gift without taxation. Gifting money for some education and health care costs are also free of gift tax consequences.  Gifts in excess of the annual exclusion are subject to a 40% tax.  Alternatively, you can elect to use your federal estate tax exemption to avoid paying taxes.

There is also an unlimited marital deduction for gifts to a spouse who is a U.S. citizen.

Generation-Skipping Transfer or GST Tax

The government established a generation-skipping transfer tax after people tried to circumvent taxation by giving the inheritance to grandchildren. A GST tax allows the federal government to receive a portion of the wealth handed down to other generations.

GST tax may kick in if you give money to grandchildren, relatives two or more generations younger, or a non-family member who is 37 years younger than you. The GST tax rate is 40 percent, but there is also a $12.06 million exemption for GST transfers.

Gift-Giving During Your Lifetime Can Decrease Your Taxable Estate

A strategy for reducing estate taxes involves annual gift-giving to potential heirs; this facilitates the removal of assets from a taxable estate to beneficiaries.

Some people pay for health care and educational bills each year because they are not subject to taxation.

Consult With An Attorney to Devise an Estate Tax Planning Strategy

Many states impose a separate inheritance tax in addition to the Federal Estate tax.  Fortunately, the State of North Carolina does not have a state inheritance tax. It still may be crucial to devise a tax planning strategy with a qualified attorney. An effective strategy will allow beneficiaries to get the most money possible.

The Brady Cobin Law Group, PLLC, understands the necessity of thorough estate planning. For more than 35 years, our dedicated North Carolina Estate Planning lawyers have helped people throughout North Carolina plan for their futures, including estate tax planning. Contact us to speak with an estate tax planning professional.