As baby boomers begin to retire and transition into the next phase of their lives, many are realizing the importance of estate planning and being able to minimize inheritance taxes.
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Because they are now on the giving end of the great wealth transfer, it has become essential for boomers to know how to manage their assets and protect their legacies efficiently.
Keep reading to find out how taxes can impact estate planning and discover ways to minimize them.
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How Taxes Impact Estate Planning
A few types of federal and state taxes come into play with estate planning. Federal estate taxes can reach up to 40%, so it is important to understand how taxes will impact your assets and your heirs.
An estate tax is a tax on the transfer of your taxable assets, which includes things such as cash, securities and other property. Estate tax only kicks in if the value of your taxable estate exceeds the federal exemption limit, which is $13.61 million for the 2024 tax year. Assets inherited by your spouse, if a U.S. citizen, are not subject to estate tax.
A gift tax is levied when transferring money or property to another person while receiving nothing or less than full value in return. The gift tax rate ranges from 18% to 40% and the gift-giver generally pays the tax. If your lifetime gifts, including your estate, exceed the federal exemption amount, — $18,000 for 2024 — you could be subject to a gift tax.
States also have their own estate and gift taxes. Some states have an inheritance tax paid by the beneficiary who inherited assets upon someone’s death. While an inheritance isn’t considered income for federal taxes, it may be considered taxable income by some states, and state inheritance tax rates can range from 1% to 18%.
Tips for Minimizing Your Inheritance Taxes
Your heirs will likely face large inheritance taxes if you have a large estate. Fortunately, there are ways to minimize your estate tax burden.
Give During Your Lifetime
Gifting assets during your lifetime can reduce the overall value of your taxable estate. Instead of leaving your heirs with 100% of your assets after your death, you could gift them while still alive.
There is an annual exclusion amount for gifts you can give before triggering gift taxes. In 2024, the exclusion will be $18,000 per recipient per year, which is an increase from $17,000 in 2023. For a married couple, it would be $36,000.