An Overview: Estate Taxes

According to the IRS, The Estate Tax is “a tax on your right to transfer property at your death.” An estate tax is a tax levied after death on any assets that are passed on through inheritance.

Estate taxes are assessed not on the price paid for any assets, but on the asset’s fair market value at the date of death. If an asset does appreciate, you may owe more in estate taxes. But if the value decreases, for tax purposes, the asset is valued at that lower amount.

The 2024 lifetime estate tax exemption is $13.61 million. This means that any estate valued at more than $13.61 million will be subject to estate taxes. The estate tax rates at present range from 18% to the top rate of 40%.

State Estate Taxes

There are 12 states that have enacted their own estate taxes and six with inheritance taxes. Each state has their own threshold for estate taxes. Connecticut has a flat tax rate of 12% but has the same exemption amount as federal. It is always important to review the laws and threshold for the individual states in question.

Ways to Minimize Estate Taxes

Estates are taxed at a fairly high rate, so understanding ways to reduce or to not owe estate taxes after death can be especially important. Most of these will involve some degree of planning.

Here are number of ways to minimize estate taxes:

• Take advantage of the unlimited marital deduction
• Establish a trust.
• Consider charitable donations.
• Utilize the gifting and the annual gift tax exclusion.
• Pay educational or medical expenses directly to the provider.

Take advantage of the unlimited marital deduction

Any amount of the estate left to the surviving spouse is not calculated in the total estate amount and is exempt from estate taxes.

Establish a Trust

There are many different types of trusts that can be set up, but one of the most effective may be an irrevocable one. In this case, an asset is moved into a trust, and you no longer have ownership or control over it. The control of the asset shifts to the beneficiary, but the donor sets the terms of the trust. In this way, it helps to reduce the value of the estate, therefore lowering estate taxes owed, and protects the asset. Irrevocable trusts cannot be changed or terminated easily. However, trusts can be very costly to set up.

Consider Charitable Donations

Leaving money or assets directly to qualified charity will help to reduce the value of your estate. You could leave a part of the estate to a charitable organization or set up a charitable trust. This could help lessen estate taxes owed or eliminate the need to file an estate tax return. There is no limit on the amount of charitable donations, but they must be left to a qualified organization. Additionally, it will also help provide funds for your favorite charities and help others in need.

Utilize the Gifting and the Annual Gift Tax Exclusion

A straightforward way to do this is by gifting assets to your loved ones while you are still alive. For 2024, you can gift up to $18,000 per person ($36,000 if you are married) for the year. (This amount is subject to change yearly). Any gift over this amount and a gift tax return must be filed. This takes a good amount of planning but is a highly effective way to reduce your estate and therefore the estate tax.

Pay Educational or Medical Expenses directly to the Organization.

Another fantastic way to help minimize estate taxes is to provide the gift of education to your loved ones or help with medical expenses. These do not fall under the yearly gifting limits, if when paying for education or medical expenses, the funds must be given directly to the organization or provider. Educational expenses are also limited to tuition.

The Bottom Line

Most people will not need to worry about estate taxes. But for those that do, there are a number of options to help minimize your estate taxes. Estate planning can be complex, so it is always recommended that you discuss your personal needs with a professional.