While planning your estate, you’ll carefully consider what to give to each of your beneficiaries carefully—your spouse, children, grandchildren, other relatives, and even friends. But there is one thing that you may not have yet considered: federal estate taxes.
One of the many roles an executor plays is tax preparer for a deceased person. The executor has to complete the deceased’s final tax return as part of the closure of the estate and pay the last of the income taxes.
An estate tax is “a tax on your right to transfer property at your death,” according to the IRS. Everything is considered, and the collective is called the “gross estate.” This can include:
- Real estate
- Businesses and business interests
- Other countable assets
Your “taxable estate” is the sum of the gross estate minus any deductions such as mortgages, other debts, expenses for administration of the estate, and assets and property transferred to your spouse, children, charities, or other beneficiaries, or into trusts.
Right now, in 2021, the point at which your estate will be required to pay federal estate tax is $11.70 million. That means that if the gross estate is $11.70 million or more, you will owe federal estate tax payments. Estates with less than $11.70 million will not.
Estate taxes are assessed at fair market value, not what you paid for them. For instance, if you purchased a house at $7 million, but the fair market value is now less than $7 million, the assessment will be at the number that’s less than $7 million. However, assets that have appreciated will be assessed and taxed at a higher rate.
Reducing The Gross Estate
Most households fall below the $11.70 million thresholds. There are options for those that exceed it.
Anything you leave to your spouse will not be counted as part of the estate, and therefore, not subject to estate taxes. When your spouse dies, the beneficiaries may be subjected to estate taxes should their gross estate exceed the threshold.
If you have a life insurance policy, consider transferring ownership to your spouse or another beneficiary. On its own, the payout is tax-free. But as part of your estate, it becomes taxable if it increases the total amount over the current threshold. Another option is an irrevocable life insurance trust.
You can also gift money to beneficiaries ahead of time, up to $15,000 per person per year. This can include tuition and medical expenses but must be paid directly to the institution.
Setting up and funding multiple trusts can also help reduce the gross estate. There are many types, but one, in particular, is called the intentionally defective grantor trust, or IDGT. This trust allows the grantor to remove trust assets from the estate and allows them to grow. Grantors continue to pay income tax on the revenue generated by the assets, but the assets can grow tax-free. Beneficiaries also won’t be required to pay gift taxes, either.
Caveat: Illinois’ Estate Taxes
Even if you’ve successfully transferred and protected assets from federal estate taxes, there is still the matter of Illinois’ own estate taxes.
Currently, Illinois is one of a dozen states that still tax an estate at the death of a testator. The threshold for an estate in Illinois is $4 million. Unfortunately, Illinois is currently considering an increase of estate taxes of 5% across the board, bringing the rate up to 21%, one of the highest in the US.
For both state and federal taxes, working with an estate planning attorney is the best way to not only plan ahead but take steps that can reduce your tax burden both now and later.
Call Provenza Law To Review And Update Your Estate Planning
When was the last time you reviewed your estate plan? Chances are it’s time to take another look and make the changes you need.
James C. Provenza is a leading Illinois estate planning attorney with years of experience helping clients with estate planning to make sure their wishes are carried out. Call our firm today at (847) 729-3939, or use our online contact form to make an appointment. We’ll help you decide which will fit best into your overall estate plan.