One of the great benefits of being a California resident is that the state does not currently have an estate tax in place. Some lawmakers want to change this but have not been successful, so far. If you are a multimillionaire in Palm Desert, however, your beneficiaries may find themselves paying up to 40% of their inherited assets in taxes to the federal government.
With a tax rate this high, is it any wonder that so many residents turn to our Palm Desert estate tax planning and trust litigation attorney at Bochnewich Law Offices for assistance? We work with you to get a full financial picture and then use this information to create strategies that help you minimize the taxes levied on your estate by the federal government.
What Are Unified Transfer Taxes?
Some tax professionals say that “estate taxes” and “inheritance taxes” can become misleading. This is because it is not the literal estate that the government taxes. Instead, it levies taxes on the transferal process as assets pass from one entity to the next. In fact, estate taxes represent only one piece of the puzzle. The full group of applicable taxes is often called the Unified Transfer Taxes by tax professionals. This also includes generation-skipping transfer taxes and gift taxes, as well as related exemptions.
Generally speaking, only America’s wealthiest one percent need to worry about estate taxes. When it comes to federal estate taxes, people who make less than $5 million began to receive an exception in 2010. In 2017, this increased to $5.49 million per individual. However, a married couple may receive a $10.98 million exemption if the first spouse to pass away meets certain requirements. The surviving spouse could also elect for “portability” to inherit the deceased’s spouse’s tax planning strategies.
Your Palm Desert civil and business attorney may help you lower your 40% estate tax rate by encouraging you to take advantage of the lifetime gift tax exemption. Unfortunately, the annual amount is low, which is one of the many reasons early planning is so important. The federal government provides an annual exemption of $15,000 for individuals and $30,000 for couples. Combined with estate taxes, the lifetime exemption is $11,580,000 for individuals and $23,16,000 for couples.
Generation-Skipping Transfer Taxes
If you decide to leave assets to grandchildren or other families belonging to two generations and earlier, your estate pays up to 40% in taxes. However, to make up the combined exemptions of $11,580,000 for individuals and $23,16,000 for couples, you may be able to include these transferred assets. Note that you can also take advantage of this exemption by transferring assets to someone not related to you who is at least 37.5 years younger.
What Are Some Common Estate Tax Planning Tools?
The exact estate tax planning strategies your Palm Desert attorney recommends will depend on your financial situation. This includes not just your net worth but also how much money you make, the sources of your income stream and how you plan to distribute your financial assets.
From there, your lawyer will determine what exemptions you become eligible for, how much of them you need and how to use as much of these over time as possible. Here are some of the primary tools we may recommend:
- Asset gifting
- Limited liability companies or partnerships
- Life insurance trusts
- Dynasty trusts
- Land trusts
- Grantor retained annuity trusts
Why Should People Update Estate Tax Plans?
Laws governing inheritance and taxation are constantly changing. The most recent big changes took effect at the start of 2018 due to the Tax Cuts and Job Acts. Since then, several of the monetary exemptions have increased and may continue to do so. However, some of the current exemptions should revert to previous figures at the start of 2025. Not surprisingly, taxation is one of the main reasons you should update your estate tax planning strategy.
Another good time to review your plan is if you experience a drastic income change. Say, for instance, that the family business takes a big hit and you are no longer bringing in several million dollars in profit per year. You may decide to reconsider how much money you gift for this and succeeding years until your business recovers. You may even choose to retire and then review whether you need any further ongoing estate tax planning strategies at all.
Family changes can also lead to the need to update tax planning strategies. If you divorce, your estate may now see its exemption cut in half. Other family changes that could cause you to revisit your estate tax plan include losing family members or gaining new ones. For example, the birth of a grandchild can provide the opportunity for you to take advantage of generation-skipping transfer tax exemptions.
What Are Some Additional Considerations?
Aside from the more obvious unified transfer taxes, there are other monetary obligations that can begin to eat into the inheritance you leave behind for heirs. These monetary obligations do not only affect the wealthy. They can impact people from all backgrounds in California. Here are some of the most common:
- Probate fees for assets that pass through the California probate process
- Debt repayment to creditors, such as mortgages and car loans
- Lawyer fees if heirs decide to contest estate plan documents in court
- Income taxes to the federal government and California
How Do You Start the Estate Tax Planning Process?
We review your case and then assign a lawyer to help you work through the finer details of your estate tax planning strategy. If you have hired a financial advisor, you may wish to include him or her in the process. Your financial advisor, accountant or tax preparer may also be in the best position to provide the attorney with all the documentation needed to make solid recommendations and finalize key decisions.
We can also work with you to create a more holistic California estate plan so that you cover all your bases, not just your taxes, such as creating a will or living trust. The first step is reaching out to the Bochnewich Law Offices serving the Palm Desert area. Give us a call at 866-698-6671 to get started.
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