Estate planning is a general term that can apply to many different areas of life. However, in its broadest sense, estate planning is the transfer of responsibility and ownership over property to parties legally obligated to respect the wishes of the original property owner.
When you begin considering the many items that fall under the definition of “property,” you’ll understand how estate planning can get confusing quickly. Add taxes into the equation, and you end up with a complex estate tax planning system that needs some explanation.
What are the common types of estate taxes?
Estate Taxes
Most of your property is taxable. This means that when your estate is transferred after your passing, that property will be subject to estate taxes.
Some exceptions apply: If your estate does not surpass the federal tax exemption limit, your property may not be taxed. Or if your spouse is set to inherit assets after your death, those property items may not be taxed according to the unlimited marital deduction.
Inheritance Taxes
If you have named an individual heir who will receive some of your property, that person will have to pay a state tax on the money or assets you left for them.
This differs from the estate tax, wherein the tax amount would come directly from your property value. The inheritance tax requires the heirs to pay the tax themselves.
Man thinking about his estate taxes as he sits at table in his home by a laptop and coffee mug
Surviving Spouse Taxes
Let’s talk more about your spouse for a moment. A qualified widow or widower is your surviving spouse who can still use the tax rates termed “married filing jointly” on their tax returns. Your surviving spouse can file as a qualifying widow or widower to get the highest standard tax deduction.
The main thing to remember is that your surviving spouse can benefit from this tax status for up to two years following your death, provided they do not remarry in that time frame.
Gift Taxes
Gift taxes are closely related to estate taxes because they share the same rate and qualify for the same exemption amounts. However, the main difference is that gift taxes apply to transfers you have made during your life—not to transfers of your property after your death.
A gift counts as any property item or amount of money you gave to someone else without receiving the same amount in return. In special conditions, the party who received the gift may agree to pay the gift tax for you; but you or your estate usually bear the brunt of the tax.
What counts as taxable estate?
Taxable estate is the amount of your property that will be subject to taxation after deductions upon your passing. This includes real estate, cash, insurance, business assets, and other property types. If a piece of property is solely owned by your surviving spouse, that property will generally not count as taxable estate under your name. But many other possessions will be subject to the taxes described above, as well as more specific tax types that apply to particular categories of property.
How can you decrease your amount of estate taxes?
You are probably already busy planning how to pass on your estate after your death. Thinking about all the taxes your estate might owe in the future can really start to feel overwhelming.
Fortunately, you have an excellent option for decreasing your tax burden: Giving. Generosity benefits the giver and the recipient, and luckily for you, it can also knock out some of the taxes you might owe before and after your passing.
Here are 3 key ways you can decrease your estate taxes:
1. Give physical gifts during your lifetime
Do you have children, grandchildren, other relatives, or close family friends whom you want to surprise with one of your treasured possessions? Now is the time!
By blessing your loved ones with a family heirloom during your lifetime, you give them a meaningful gift while decreasing the taxable assets in your possession after death.
With one less thing for your heirs and estate planners to worry about while grieving, your loved ones can focus on being together. And to put it simply, you can enjoy the act of giving in the meantime!
2. Donate to charity
If you have boxes of items labeled “charity” for your family to give away after your death, do everyone a favor and donate them now instead. This is a great way to eliminate taxable estate while helping those in need.
Bear in mind that you should donate to a qualified organization for it to count as a deduction on your tax forms. Here is a list of some types of organizations that qualify:
- Churches, synagogues, or other religious organizations
- Public cemeteries (as long as you donate to the cemetery as a whole and not a specific plot)
- Community foundations that exclusively operate for charitable causes under the laws of your country
- War veterans’ organizations
- Public libraries that operate under federal, state, or local governments
- Nonprofit volunteer firehouses
3. Help cover the costs of tuition, medical bills, or other hefty fees for your loved ones
Again, this good deed is best done while you are still alive to reduce your taxable estate. Do you have a loved one struggling to pay their way through school? Lend a helping hand by paying part or all their tuition directly to their school.
If someone you care about is in the hospital, you can assist with the medical costs—if you pay the healthcare facility and don’t simply give money to the individual in question. So, if you plan to help financially, make sure you pay the bills directly instead of privately reimbursing your loved ones.
Consult a lawyer about your estate taxes
Estate planning is complicated. Adding taxes to the equation is a whole new level of complexity. While we encourage you to tackle it head-on and take care of business, we also hope you don’t try to do it alone. A lawyer can help you in many different areas of estate planning. You can ask your lawyer questions, get guidance on the best steps to take, receive assistance with contracts, forms, and other paperwork, and rest easy knowing you have experienced legal help.
Find out more about how a provider law firm can help you with various aspects of estate and tax planning.
Pre-Paid Legal Services, Inc. (“PPLSI”) provides access to legal services offered by a network of provider law firms to PPLSI members through membership-based participation. Neither PPLSI nor its officers, employees or sales associates directly or indirectly provide legal services, representation, or advice. The information available in this blog is meant to provide general information and is not intended to provide legal advice, render an opinion, or provide any specific recommendations. The blog post is not a substitute for competent legal counsel from a licensed professional lawyer in the state or province where your legal issues exist, and the reader is strongly encouraged to seek legal counsel for your specific legal matter. Information contained in the blog may be provided by authors who could be a third-party paid contributor. All information by authors is accepted in good faith, however, PPLSI makes no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of such information.
