Understanding Estate Taxes and How to Minimize Them
In the United States, estate taxes are charged on the total value of a deceased person’s assets before distribution to heirs. This is different from an inheritance tax, which is paid by the beneficiary based on what they individually receive.
U.S. Estate Tax Overview
Estate taxes only apply to high-value estates. For 2023, the federal exemption is $12.92 million per individual, indexed annually for inflation. This amount is set to drop to roughly $6.8 million per individual starting in 2026 unless Congress acts. Estates valued above the exemption must file a federal estate tax return and pay taxes on the amount that exceeds the limit.
Executors (personal representatives) are responsible for filing the return and paying taxes from estate funds.
Unlimited Marital Deduction
The federal tax code allows unlimited transfers of assets to a surviving spouse, tax-free, during life or at death. However, this only delays estate taxes. After the surviving spouse’s death, any amount over the exclusion limit becomes taxable.
Assets Subject to Estate Tax
The estate tax applies to the fair market value of:
Cash and bank accounts
Real estate and investments
Personal property (art, jewelry, collections)
Some life insurance proceeds (if the decedent owned the policy)
Exemptions and Deductions
You can lower your estate’s taxable value by:
Leaving assets to a spouse
Making charitable contributions
Using applicable credits and deductions
Strategies to Reduce Estate Taxes
Proper planning is essential. An experienced estate planning attorney can help by:
Setting up trusts, gifting strategies, and other tools to reduce the taxable estate
Reviewing and updating your plan regularly
Ensuring compliance with federal and state tax laws
Guiding executors and trustees to minimize taxes and maximize asset value
State Estate and Inheritance Taxes
Twelve states also impose estate or inheritance taxes, with different thresholds and rules. If you live in one of these states, consult an attorney to understand your state’s specific requirements.
Spending Down or Transferring Assets
Consider reducing your taxable estate by:
Making lifetime gifts to loved ones or charities
Funding irrevocable trusts
Relocating to a state with no estate or inheritance tax
Using your wealth for personal enjoyment now (travel, experiences, or helping family)
Create Your Estate Plan
Define your goals: who should inherit, who will manage your estate, and how to minimize taxes. An attorney can help you organize financial records, review beneficiary designations, and develop a tax-efficient plan that evolves as your life changes.
Start planning today to protect your legacy and transfer your wealth efficiently.
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