Estimates indicate that no more than 1% of Americans will even need to consider whether estate taxes will be an issue upon their deaths, and some of them could live right here in California. If you are among those with an estate valued at greater than $11.4 million as a single person or $22.8 million as a couple for the 2019 tax year, then you may need to know what you can do to avoid paying estate taxes or at least significantly reducing them.
The Tax Cuts and Jobs Act will increase these exemptions each year until 2025, at which time the amount drops drastically. More than likely, you intend to live well beyond 2026, so now would be a good time to begin planning. In order to keep your estate from owing a substantial amount in taxes, you first need to understand what makes up your estate. Fortunately, California does not have an estate tax for you to worry about.
Calculating the value of your estate
When it comes to valuing your estate, you need to include everything you own, including the following:
- Savings accounts
- Real estate, including homes
- Life insurance policies
- Stocks and bonds
- Cash and other collectibles
Obviously, this list is not an exhaustive one. You may own other property and valuables that will increase the amount of your estate. If the value is less than the tax year's exemption, for example $11.4 million (single) or $22.8 million (married) for 2019, then your surviving loved ones will not owe any estate tax. However, if your estate exceeds these values, your estate incurs tax on the amount above the exemption, which your loved ones must pay within nine months of your death.
How can you keep the value of your estate low?
Trusts are an effective vehicle for reducing the value of your estate for tax purposes. For example, if you have life insurance policies, you could put them into an irrevocable life insurance trust, which reduces the amount of your estate. You could put other assets into irrevocable trusts as well since the IRS views assets in revocable trusts as taxable since you still have control over them.
You could also give gifts to loved ones up to a certain amount each year. Doing so not only lowers the value of your estate, but if you do not exceed that year's gift amount, you owe no taxes on them either. Your circumstances may benefit from other methods of reducing your estate tax liability as well. It would be worth your while to sit down with an estate-planning attorney to explore your options and devise a plan that will serve you and your loved ones well into the future.