The Good News and the Bad News…

An estate tax is a tax your heirs owe when you transfer property at your death. The good news is that under current IRS rules, for “relatively simple estates,” unless the combined gross assets exceed $12,060,000 (in 2022), you don’t have to file a federal estate tax return.So, the assets are not taxable.

The bad news applies to residents of 17 states with estate or inheritance taxes. For example, the Washington State estate tax is 10 to 20 percent on estates above $2.2 million. In Hawaii, estate tax is 10 to 20 percent on an estate valued above $5.5 million.

So, if you want to leave your heirs as much of your wealth as possible, plan on dying in a state that has no estate or inheritance tax.

The IRS can still get a chunk of what your inheritance generates.

While the IRS has eased up on inheritance and estate taxes, there are still some tax obligations that accrue to heirs as a result of receiving the inheritance, for example:

• money withdrawn from an IRA or 401(k), which is subject to income tax—i.e., money that was not taxed before it was added to the account (does not apply to an after-tax contribution to a Roth IRA)
• any income earned on the inheritance after the death of the decedent—applies to assets earned both directly or through a trust, e.g., rental property income or an increase in property value
• any interest earned, but not paid out before the decedent’s death—for example, the before-tax IRA, also including a dividend on an investment or a savings bond

Estate planning is not just for the wealthy.

If you own property, have money in investments and savings, you have an estate. If you want to control how your property and wealth is managed beyond your lifespan, you need an estate plan. In Arizona, for example, state law will determine how your property is distributed. If you want your heirs to avoid expensive probate, you need a plan.

Your plan can include legal strategies to avoid estate tax through:

• gifts to family members, up to $30,000 to any one person (tax-free), with a lifetime limit of up to $11.7 million before having to pay gift taxes
• an irrevocable life insurance trust to shelter the beneficiary from the value of your estate
• a charitable trust that sequesters assets for the charity you designate
• a limited partnership for family-owned business assets to make family members limited partners and heirs

Tax planning is but one element of the components of a quality estate plan.  Dana Law Group’s estate planning experts are your Arizona resource to protect your estate and hard-earned assets.

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