While many of us try to avoid thinking about the time when we will no longer be with our loved ones, there are still important aspects to taking the time to set out both our will and how we want to have our estate handled upon our passing away. This would include various tax benefits that early planning can bring to your beneficiaries. Consulting with a tax professional or estate planner, such as James Carroll in Tempe, AZ, you can find the best route for your unique circumstances to prepare your estate for the future. One of the most important things to consider is reducing the amount of estate taxes that your beneficiaries will have to pay upon your death. Below are just a few points to consider as you begin your estate planning.
Understanding What Estate Taxes Are
Estate taxes are an additional tax that is required to be paid on top of probate taxes and final income tax. These taxes are typically very expensive and can mean that your estate must liquidate assets to pay the taxes, thus reducing the amount of your estate available for your beneficiaries. However, planning can help you to eliminate these very expensive taxes, or at the very least, reduce the amount owed to the government.
Depending on the tax year, the exemption level for federal estate taxes may vary. Estate tax law can change and so while one year, your estate would face estate taxes, another year it might not. Therefore, it is important to make sure that you have empowered those in charge of your estate to make the necessary financial choices to benefit the estate.
Additionally, it is important to note that your estate may not qualify for a federal estate tax, but may still need to pay an estate tax on the state level. Therefore, you will want to work with a tax professional or accountant that is familiar with the estate laws in your state as you complete your planning.
How Do You Determine the Value of an Estate?
An estate is typically defined by your assets minus the payment of any debts that you may have. Included in your estate will be your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and any death benefits that are part of your life insurance. As a result, your family or designated representative will have to calculate how much is part of your estate as part of the execution of your will.
So how can you work to reduce or eliminate your estate taxes? There are several ways. The first is that if you are married, you will want to use both of your estate tax exemptions. Working with an estate planner, you can take advantage of each of your exemptions, while enjoying the benefits of a spouse not paying estate tax on anything inherited from their marriage mate. Part of this solution would involve setting up a living trust for both spouses to take advantage of these exemptions.
Another option is to reduce the amount of your estate before you pass away. This could include not only spending some of your estate while you are still alive, but also making some gifts to individuals that may have originally been in your will. The best gifts to give would be any of your appreciating assets, as they can make your estate bigger as they continue to grow. One popular strategy is to give tax-free gifts before your passing on an annual basis. With tax-free gifts, you are able to give a set amount to as many individuals as you wish each year with no taxes incurred. However, state laws may differ regarding the taxes that might need to be paid for these gifts. Other tax-free gifts include charitable donations, medical expenses and gifts for tuition.
As you can see, it is possible to reduce your estate taxes to reach the exemption level, which would assist your beneficiaries to not have to pay any estate taxes. Yet, as with any tax reductions, it is important to do as much preplanning as possible. This really involves sitting down with your estate planner or tax professional and talking about what you want in terms of passing on your assets to your beneficiaries.
Click on the link below to contact your tax professional or accountant at James Carroll in Tempe, AZ, who can assist you understanding all the potential tax implications of your estate planning and how to maximize the benefits for your beneficiaries.
