Estate Tax Explained
California phased out the requirement to file a State estate tax return for descendants who died on or after January 1, 2005. However, the Federal estate tax is still enforceable. The Federal estate tax only affects a small percentage of wealthy Americans, estimated at two out of every 1,000 estates. But for those that are required to pay the estate tax, the nuances in the law can have significant repercussions. Thus, for any Californian concerned about the estate tax, it's important to familiarize yourself with the recent changes in estate tax law, so you can know what to expect.
The estate tax is a tax on the right to transfer property (assets) to heirs and beneficiaries after your death and is separate from income tax on the income those assets generate. Estate tax thresholds have changed dramatically over the years.
For descendants who died in 2011, the estate tax exemption threshold is $5,000,000. That number rose incrementally over the last seven years. The threshold is $5,120,000 for descendants who died in 2012, $5,250,000 for descendants who died in 2013, $5,340,000 for descendants who died in 2014, $5,430,000 for descendants who died in 2015, $5,450,000 for descendants who died in 2016, and $5,490,000 for descendants who died in 2017.
In 2018, the Federal estate tax threshold made an unprecedented leap from $5,490,000 in 2017 to $11,180,000 in 2018. This new threshold means only estates valued at $11,180,000 or above are subject to the estate tax. The Federal estate tax applies to the value of the estate that exceeds the exemption threshold.
Gross Estate vs. Taxable Estate Value
For most of us, estate tax laws are of little concern. But for those who near the threshold, learning more about the Federal estate tax can pay big rewards. The estate tax applies to the total value of your gross estate after the exemption amount, including all assets assessed at their fair market value, not the value you paid for them. Your estate could include real estate, cash, stocks, business interests, insurance, annuities, trusts, and other property.
As with many taxable assets, various deductions can be used to lower the value of your gross estate. For example, there are marital deductions, charitable deductions, deductions for mortgages and other liabilities, and deductions for costs and losses incurred from the management of the estate. Trusts are also sometimes used to transfer assets tax-free, and there are also methods of controlling value growth to limit your taxable estate.
You have many ways to take advantage of these deductions when planning for your estate. Doing so effectively can reduce our overall taxable estate, thus preserving more of its value after the estate tax. However, numerous exclusions and exemptions can affect your ability to leverage these deductions, so you should always consult with an attorney when planning your estate to ensure it is not overvalued.
Working closely with a California estate planning attorney can ensure you take full advantage of all the available deductions to minimize your tax liability. Doing so takes careful planning in advance, strategic asset organization, utilizing estate planning tools such as trusts, and exploring every possible avenue of planning your estate to preserve its value for your loved ones.
Likewise, even Californians whose estates will pass under the Federal estate tax exemption threshold should work closely with a California estate planning attorney to ensure their estate will be handled according to their wishes and to make sure its value is protected and preserved. It's never too early to consider estate planning, as many components of a comprehensive estate plan require careful forethought and decision-making. For example, you may wish to establish a trust for your grandchildren, but you will need to designate a trustee and craft guidelines on how and when they can access the funds. Simply starting an estate planning conversation with a reputable estate planning attorney can provide peace of mind knowing your loved ones will be taken care of.
Are you ready to start your estate planning? Fresno area estate planning attorney Christopher Martens can help you carefully plan your estate to preserve wealth and protect your loved ones' interests. Attorney Christopher Martens has the skills and knowledge needed to help you ensure your wishes are carried out properly. Serving the Visalia and Fresno areas, The Law Offices of Christopher Martens can provide strategic estate planning guidance. Call our office at 559-967-7386 or email us at [email protected] for a free consultation.