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Beyond the Grave: How Death Taxes Impact Your Estate Planning

Jaime Aulicino, EA

[email protected]

When the only things certain in life are death and taxes, why are death taxes not discussed more often? Somewhat of a misnomer, death taxes, often referred to as “Inheritance or Estate Tax,” sound ominous and can even be a bit misleading. This blog aims to demystify the concept, shedding light on what death taxes really are, who they affect, and how to effectively plan for them.

Estate Tax

There are generally two types of death taxes – Estate Tax and Inheritance Tax. Estate Tax is a tax on property transferred by a decedent to other parties upon death. This property takes the fair market value at date of death, and may consist of cash and securities, real estate, insurance, assets held in trust, annuities, and business interests. That value is then reduced by allowable deductions and liabilities, which include mortgages and other debts, estate administration expenses, and property that is passed to a surviving spouse and/ or qualified charities. If the decedent made any taxable gifts during their lifetime, these values are also added to the gross estate. If there is a net estate remaining after the above items are combined, then it is reduced by the available lifetime exclusion amount.

Filing an estate tax return is only required if the gross estate is valued above the filing threshold for the year of the decedent’s death. Therefore, if an individual passes away in 2024, an estate tax return will need to be filed if the gross estate was valued over $13,610,000.  It is important to note that the estate thresholds are set to reduce dramatically in 2025, unless the current law is amended.

If the estate is valued at less than the filing threshold, an estate representative may decide to still file an estate tax return if there is a surviving spouse. By filing a return under such circumstances, married decedents may elect to pass any of their unused lifetime exemption to their surviving spouse; but this may only be done if an estate tax return for the original decedent is timely filed and includes the election.

Inheritance Tax

The other type of death tax is Inheritance Tax. The federal government does not impose this type of tax, but some states do, including Pennsylvania. This tax is levied on the beneficiary for the transfer of assets from a decedent. In all states imposing an inheritance tax, passing property to a surviving spouse is exempt from this tax. In addition, Pennsylvania also exempts the passing of property to a parent from a child aged 21 or younger. Transfers to other beneficiaries are subject to tax at varying rates according to applicable statutes.

Beginning September 6, 2022, Pennsylvania also made an exception for personal property that is transferred from the estate of a serving military member who has died as a result of an injury or illness received while on active duty.

Planning Tools

Most of us would like to leave our friends and family something when we pass, and typically that does not include a large tax bill. Fortunately, there are several strategies we can employ to mitigate or potentially avoid these taxes altogether.

First and foremost, making use of the annual gift exclusion can be highly beneficial. This strategy allows you to gift a certain amount every year to as many individuals as you wish without triggering any gift tax. In 2024, the exclusion is $18,000 per beneficiary. The recipient of a gift does not pay gift tax.

Secondly, setting up an irrevocable trust can provide a legal structure to hold contributed assets outside of your estate. Lifetime contributions to the trust can avoid gift tax to the extent of the annual exclusion, and grow in value over time free of estate tax.

Finally, consider charitable donations to organizations that are important to you. When bequests are made from an estate in the form of a donation to a qualified charity, these donations are deducted dollar-for-dollar.

Conclusion

Although the subject of death taxes can seem daunting and complex, it is an important concept to familiarize yourself with for the sake of your financial future and that of your heirs. In our ever-changing fiscal landscape, being well-informed of tax implications can make a significant difference in preserving wealth.

Professional advice can provide tailored strategies to minimize tax liabilities and at Louis Plung & Company, we are committed to helping you understand and plan for these taxes effectively. Please reach out to your trusted Louis Plung & Company advisor today or e-mail [email protected] to receive personalized solutions.

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