Estate taxes can be as high as 46% and are collected on property left to surviving family members. An estate tax exclusion can reduce or eliminate these taxes, and there are tools to minimize them, such as the gift tax credit and charitable donations.
Estate taxes are collected on property left to surviving family members after the death of a loved one. These taxes can be as high as 46%, which can make many heirs wonder if they qualify for an estate tax exclusion. An estate tax exclusion is a condition that allows these taxes to be reduced or eliminated.
Property is taxed at the same rate as gifts, which are taxed at a much higher rate than personal income. Rates increase progressively as the size of the estate increases. Those heirs to large family legacies of more than $2 million US dollars (USD) are taxed at 46%.
When a person chooses to skip a generation, the estate tax doubles. For example, if a grandparent bequeaths $2 million dollars to a grandchild, the amount is taxed at the regular rate of 46% with another 46% on top of that. The $2 million dollar estate is reduced to approximately $584,000 USD.
For those seeking an estate tax exclusion, Congress has provided some level of relief. In 2002, an Estate Tax Credit was established that allows someone to transfer a set amount of money tax-free. This credit has been gradually increased since 2002 until it is fully repealed in 2010. In 2011, the tax rates will return to their 2002 levels. The amount allowed as of 2011 is approximately $1 million.
There are tools that people with large estates can use during their lifetime to minimize estate taxes. The gift tax credit can be used while a gift giver is alive. This allows a parent to transfer approximately $12,000 USD annually to each child without either party facing taxes. These gifts can be in cash or property and college tuition can be paid on top of this without counting against that total.
Property passed between spouses has an estate tax exclusion. This can be a double-edged sword because once the spouse has passed on, the money will be passed on to other heirs and taxed on them. The gifting couple can help reduce these taxes by systematically dividing up the estate, as this exclusion allows additional time to do so.
Charitable donations also have a complete wealth tax exclusion. For those with a philanthropic heart, some taxes can be reduced by leaving some or all of an estate to a charity of your choice. Many wealthy people choose to leave a percentage of their estate or a set amount of money to their favorite charities.
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