Death and Taxes: Planning ahead can save you and your family

Some of the biggest misunderstandings we see in probate and estate planning involve taxes. Here are some explanations of the different types of taxes after a person dies. Many times, we see DIY estate planning done in an effort to avoid probate or taxes, and misinformation results in more taxes. It is critical to get guidance regarding estate planning before executing documents on your own.

Estate Tax vs.
Inheritance Tax

• The estate tax is paid by the deceased’s estate before the assets are distributed to heirs.

• An inheritance tax (which only exists in certain states, not at the federal level) is paid by the individuals heirs after they receive their inheritance.

• The federal government only imposes an estate tax, not an inheritance tax.

State Inheritance Taxes

• Some states impose their own inheritance taxes. These state-level taxes may apply even if an estate is not subject to the federal estate tax.

• Kentucky has inheritance taxes, but it depends on the relationship of the deceased person to the beneficiary. There is NO Kentucky inheritance taxes on assets left to spouses, parents, grandparents, children, grandchildren, and siblings. Other familial relationships or no relationship will result in taxes on the distribution.

Federal
Estate Taxes

The federal estate tax is a tax on the transfer of property upon a person’s death. It applies to the total value of an individual’s assets (estate) at the time of their death, but only if the estate exceeds a certain exemption threshold. Here’s a detailed explanation of how the federal estate works:

What Is the Estate Tax?

The federal estate tax is levied on the value of the decedent’s estate, which includes all assets,

such as:

• Real estate

• Cash and bank accounts

• Investments (stocks, bonds, mutual funds)

• Personal property (e.g., jewelry, art)

• Retirement accounts (IRAs, 401(k)s)

• Business interests

• Life insurance proceeds (if the deceased owned the policy)

The tax is paid by the estate before the assets are distributed to heirs or beneficiaries.

Federal Estate Tax Exemption

• Exemption threshold: The federal estate tax only applies if the value of the estate exceeds a specific exemption amount. The lifetime gift/estate tax exemption is $13.61 million in 2024 and 2025. The lifetime gift/estate tax exemption is projected to be $7 million in 2026.

• Portability: If a spouse passes away, any unused portion of their exemption can be transferred to the surviving spouse, effectively doubling the exemption for married couples. This is known as “portability.”

• Estates above the exemption threshold are only taxed on the portion of the estate that exceeds the exemption.

Gifts and Lifetime
Transfers

• Gift tax: The U.S. also has a gift tax that applies to the transfer of assets during a person’s lifetime. However, you can give up to $17,000 per person per year (for 2024) without triggering the gift tax.

• Gifting over the annual threshold does not necessarily mean you will owe money, it means you need to report it. After your death, your estate and all reported gifts will be added to determine if you are under or under the combined lifetime exemption.

• The gift tax and the estate tax share a combined lifetime exemption. If you give away more than the annual limit in gifts (12.9 million in 2024), the excess amount will count against your lifetime estate tax exemption.

Estate Planning and Strategies

Individuals whose estates are likely to exceed the exemption often engage in estate planning to reduce or avoid the estate tax. Common strategies include:

• Gifting: Giving away assets during your lifetime to reduce the size of your taxable estate.

• Trusts: Using irrevocable trusts to transfer wealth out of your estate.

• Charitable donations: Making charitable donations through your will or estate to reduce the taxable estate value.

• Family Limited Partnerships (FLPs): These can be used to transfer assets to family members at a lower valuation for estate tax purposes.

Tax Filing and Payment

• The estate’s executor is responsible for filing an estate tax return (Form 706) and paying any estate tax due.

• The estate tax return is due nine months after the decedent’s date of death, although a six-month extension is available.

Summary

The federal estate tax only applies to estates exceeding $12.92 million (as of 2024). While most people won’t face federal estate taxes due to the high exemption threshold, proper estate planning can help individuals with larger estates minimize the tax burden. Depending on who you leave your estate to, there may or may not be an inheritance tax. It’s important to understand the tax implications before transferring assets. Let the attorneys at The English Law Group explain the taxes that may apply to your estate.