Estate Taxes: An Overview
When the time comes to distribute your wealth and property, you want your family to get as much as possible. You can bypass several taxes and frustrations with the proper planning and forethought.
Unfortunately, if you’re unaware of some of the hidden taxes and fees of owning and transferring an estate, you can lose up to 40% of your wealth in taxes alone.
Estate taxes, also known as death taxes, are unique in every state, so you must understand how they affect your location. Since our firm practices in Arkansas, let’s look at estate taxes from an Arkansas resident’s perspective.
Federal Estate Tax
Regardless of your state, you can’t avoid federal estate taxes altogether. The federal tax rate is a progressive rate, which means that as the value of the estate increases, the taxed percentage rises.
Your estate’s value also determines when you must start paying taxes. The current exemption value is $12.06 million.
If your estate values are below this number, you qualify for federal estate tax exemption. If your estate is worth more, you must pay federal estate tax depending on the taxable estate.
Although most estates don’t reach this threshold, you and your spouse can avoid taxes with the right plan. Save money by working with an experienced accountant and legal advisor to split your estate to avoid the federal estate tax when you pass away. If done correctly, you can retain a value of over $24 million without paying taxes.
Another way to avoid overpaying taxes is to revalue your estate. This practice is beneficial during times of lower value. In other words, if your estate is currently worth less than you bought it for, the cost basis adjusts to the current market value.
State Levied Estate Tax
Arkansas doesn’t levy an estate tax on its residences. The Natural State is one of 38 states without this tax.
Inheritance and Gift Tax
Whether or not your estate reaches the federal tax threshold, your inheritors may need to pay taxes on their money.
Although Arkansas doesn’t enforce an inheritance tax, this type of tax crosses state lines.
For example, suppose you receive an inheritance from a relative in Pennsylvania, a state that enforces this tax on inheritors. In that case, you’re subject to an inheritance tax even though you live in Arkansas.
The best way to know whether you owe inheritance taxes on inherited money from out-of-state is to check with the grantor’s state. They’ll tell you what you owe.
In a similar vein, Arkansas doesn’t charge a gift tax. A gift is any amount of money per year sent to an inheritor.
Although Arkansas doesn’t have a gift tax, you must report it to the IRS if you gift over $16,000 per person per year per gift. These gifts also count against your lifetime gift tax exemption of $12.06 million.
Estate taxes are a headache and require plenty of legal acrobatics. Navigating through the paperwork is challenging. Thankfully, Arkansas is one of the tax-friendliest states, especially for estate taxes.
Nonetheless, there are always ways for you to save money and refrain from paying more taxes than necessary. If you need legal advice on your estate, contact Hickey and Hull Law Partners today.