Minimizing or eliminating taxes triggered by asset transfers at death is a common estate planning goal. Estate planning attorneys often get the question, “Will my beneficiaries have to pay death taxes?” We’ll answer this question below.
First, we’ll clarify that it’s your estate that owes any applicable taxes at your death. Your beneficiaries don’t pay the taxes; an inheritance doesn’t trigger income taxes (unless the inheritance is a retirement account and assets are distributed out of the account.) All death related taxes will be paid before your beneficiaries receive their inheritances.
Second, the term, “death taxes,” usually refers to the federal estate tax, so we’ll talk about that. There are other transfer taxes that may be triggered at your death, depending upon the size of your estate, your estate plan, federal law and your state law.
Third, federal estate taxes are a voluntary tax. They are voluntary in the sense that you only pay them if you don’t plan. There is much you can do to eliminate federal estate taxes. Ifyou have other goals that conflict with saving taxes, the federal estate tax can still be minimized.
Fourth, every individual is entitled, under federal law, to pass a certain amount of assets without paying any federal estate tax. In 2011 and 2012, the exemption is quite high; it’s $5 million. You can give away up to $5 million during your lifetime or at your death without paying any federal estate taxes. However, the exemption is set to return to $1 million in 2013 and many estates will be subject to the tax if they don’t have a comprehensive estate plan.
Fifth, there are many ways that your estate planning attorney can help you avoid the federal estate tax. Married couples can use an AB tax minimizing plan in their trusts. There is also life insurance, grantor annuity, personal residence and charitable trusts that are used to eliminate or minimize the federal estate tax.
It’s up to you whether your estate pays death taxes or not. Consult with a qualified estate planning attorney.