Estate planning and tax planning go hand in hand. But to get them both right, you'll need to learn a few important things. These valuable elements of good estate tax planning help prevent unnecessary taxation for both you and your heirs or beneficiaries. What should you become familiar with before you start estate planning? Start with these 5 vital concepts.
1. Basis for Heirs
When a person inherits assets, they aren't generally taxed upon receiving them. But they will be taxed on profit made when they eventually sell that asset. The tax basis of the item is the cost of the asset that is deducted from the selling price to reach the taxable portion. When you understand how basis is calculated for heirs, you can use assets within your estate in ways that don't penalize them later on.
2 Revocable and Irrevocable Trusts
The use of trusts within estate plans can help avoid taxes both now and later. Irrevocable trusts don't affect your taxes and help your estate avoid probate issues. But you must craft the right kinds of trusts — both revocable and irrevocable — to legally avoid tax issues both for you and for anyone who receives assets.
3. Gift Taxation
Did you know there is a federal gift tax as well as an estate tax? If your estate may reach the threshold for the estate tax, you do well to make use of the gift tax exemptions while you're still around. Currently, you are allowed to gift up to $15,000 annually to any individual without either party paying taxes. This can also help you give assets that may appreciate in value without incurring unnecessary taxes for the recipients.
4. Marital Exemptions
What you leave to your spouse is generally not taxed. However, there are limitations you'll need to abide by. The method of transfer — including the type of ownership or trust and how long it lasts — can affect whether or not the asset is exempt from probate and exempt from taxes.
5. Generation-Skipping Taxes
Do you plan to leave assets to family members other than your spouse or direct descendants? Then you'll need to understand how the generation-skipping transfer tax may apply. This tax is specially targeted to prevent individuals from dodging estate taxes by transferring money to grandchildren or other generations so that these assets aren't taxed when the first generation passes away.
Many of these tax concepts can be very confusing for the average person doing estate planning. The best way to learn about them and how they affect your particular estate is to work with an experienced tax planning service in your state. Make an appointment today to start crafting the best plan for you and your heirs.