Preparing for taxes in your estate plan

Many of us have heard the old saying, “Nothing is certain except for death and taxes.” Sometimes, the two go hand in hand. When creating an estate plan, it is essential to consider tax implications for your property and assets. Today, we look at the essentials of “death taxes” in California.

What do we mean by “death tax?”

The term “death tax” generally refers to estate taxes, which are paid to the state or federal government before the person’s estate is dispersed. Estate taxes are different from inheritance taxes, which apply to the inheritance someone receives from an estate. Gift taxes also often appear under this umbrella.

State vs. Federal death taxes

California, along with 37 other states, does not have its own estate tax or gift tax. However, federal taxes apply for certain estates or gifts. In 2019, the estate tax exemption increased to $11.4 million, meaning only those with estates valued at more than $11.4 million must pay estate taxes. Meanwhile, federal gift taxes apply to gifts of more than a $15,000 value.

These exemptions mean that, for many California residents, estate and gift taxes need not be concerning. But, for those whose estate is worth more than $11.4 million, the federal estate tax is steep: 40%.

How the IRS determines the value of your estate

For tax purposes, property considered part of someone’s estate includes:

  • Cash and securities
  • Real estate
  • Insurance policies
  • Trusts
  • Business assets
  • Farming interests
  • Annuities

After calculating this “gross estate” value, the IRS makes certain deductions to determine the value of someone’s “taxable estate.”

The benefits of planning ahead

Estate and gift taxes can have a profound impact on the amount of property you can give away. Working with an estate planning attorney who has additional knowledge of tax can help ensure your estate plan accounts for applicable taxes.