Death and Taxes: Managing Estate Tax

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by Advice Chaser
by Advice Chaser

Whenever you transfer property, there’s a chance you might have to pay taxes. That’s even true if the property changes hands because someone died. Popularly called “death tax,” estate tax governs the transfer of property after someone’s death. In your estate planning, you can reduce the amount of tax your estate will have to pay with the right strategies.

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What Is the Estate Tax?

The federal estate tax is a tax on the estate itself which must be paid before the property passes to the heirs. Several states have an estate tax of their own as well. And some states have an inheritance tax, which has to be paid by the heirs after they inherit the estate.

Only about one in 500 people will ever pay the estate tax. Those that do will pay an average of one-sixth of the value of their estate. It’s intended as a tax on wealthy estates only. In 2017, a large increase in the exemption amount freed midsize estates from their previous tax burden. However, this increase is set to expire in 2025 if it isn’t renewed.

The federal estate tax earns the government billions every year while targeting only the wealthiest families. Since a large part of an estate may consist of unrealized capital gains that were never taxed, the estate tax helps recover some of that lost revenue. 


Most people will never have to worry about estate tax. The federal estate tax only kicks in for amounts over $12.92 million. So if you’re not a millionaire, just looking to pass on the remainder of a small retirement fund, your home, or a few investments, estate tax won’t be a concern for you. However, keep in mind that several states have their own estate or inheritance taxes with their own limits.

Spouses are also exempt—property passes directly from a deceased spouse to the surviving spouse without being taxed. Of course, when the surviving spouse then dies, the estate will be taxed when it is passed on to their other heirs.

Despite these exemptions, some families remain concerned. Even if you don’t have millions sitting in the bank, sometimes families own a farm or business that’s worth enough for estate tax to kick in. This situation can be extra difficult if that farm or business is the only asset in the estate. You don’t want to sell your family’s legacy to pay the taxes.

If this describes you, keep in mind that only the amount over the exemption limit will be taxed at all. Just like your top marginal tax rate only affects the top slice of your income, estate tax is only levied on a portion of your estate. So even if you do cross that threshold by a bit, that doesn’t mean the tax you owe will be very large.

Avoiding the Estate Tax

If your estate is above the exemption level, a few strategies can reduce your liability. These strategies have to be part of your estate plan now—after you die, it’s too late for your heirs to do anything about taxes. You’ll need to work with both a financial advisor and a lawyer to craft an estate plan that covers all your assets.

One popular method for reducing estate tax is called a grantor retained annuity trust. You place some of your assets in the trust and receive back an annuity to cover your expenses during your life. Then, after your death, your heirs receive the assets and whatever appreciation they’ve earned. While the initial assets remain liable to estate tax, the appreciation does not. Whether this saves you much in taxes depends on economic factors, so talk to an advisor about whether it makes sense in your case.

Another way is to simply get rid of as much of your wealth as you can before you die. You can’t take it with you! Any amount of charitable donation is tax free. Gifts to your friends and family are tax free up to the gift exemption, which is $17,000 for each person you give assets to. And, of course, spending down your savings will reduce the tax burden on your estate. A good retirement plan can handle the possibility of a long retirement without leaving too much hanging around in the fund at the end of your life.

You Need an Expert

If you have a large enough estate to even think about estate taxes, you shouldn’t be managing your finances yourself. With amounts that large, your tax liability can varydrastically depending on your savings and investing choices. An expert in large estates can help you keep your assets earning you money instead of costing you taxes. Contact us today to find an advisor who knows how to manage your specific situation.

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