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The ABCs of Estate Planning and Taxes

They say only two things are certain in this world: death and taxes. In most countries, such as the United States, both of them can still go together. The term for that is the estate tax.

While taxes fund government projects and social services, many Americans may want to avoid it as much as possible. This is especially true when it hits assets that their loved ones could have enjoyed.

Fortunately, those who have accumulated assets can explore different estate planning strategies. One of these is maintaining a trust fund in Utah. Americans, though, can make better financial decisions if they are also aware of the ABCs of the estate tax.

Estate Taxes and Exemptions

An estate tax is a tax levied on the assets owned by the deceased. These can include cash, real properties, and investments, such as income from the stock market or mutual funds.

The federal estate tax is different from a state’s version, which others sometimes call “death tax.” Some states like Utah don’t have any. It is also different from inheritance tax, which the beneficiaries pay, or gift tax. The latter has its exemptions and terms and conditions.

In the United States, the estate tax rate can be as high as 40%. The good news is there’s a tax exemption, which is now $11.8 million. In other words, if the total assets are below this amount, then the estate doesn’t pay anything. Otherwise, only the difference becomes taxable.

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To understand this, let’s pretend that the total assets are worth $13 million. The taxable amount is only $1.2 million, while the estate has a liability of $480,000.

Exemptions, however, can come with a long list of criteria. One of the factors that can affect these is marriage. Often, the spouse inherits the assets of the deceased, especially if there’s no living will or trust fund in place. While it increases the wealth of the spouse, it also boosts the odds of the total assets to surpass the exempted amount.

Continuing on the example above, let’s say the spouse has an accumulated asset of $2 million. Upon the death of the partner, it grows to $15 million. With no intervention or estate planning, the estate ends up paying taxes for the excess.

How to Avoid or Reduce Estate Tax

Although some assets depreciate, most grow over time. Take, for example, income from investments or real estate. If the person isn’t careful, the wealth can balloon. Some of the assets may still be subject to taxes.

This is where estate planning comes in. The purpose isn’t to hide the assets from the IRS but to plan its management to avoid paying massive taxes later on. The process can also save the beneficiaries the hassle of probate.

Some of the options they can explore include the following:

  • Setting up a trust fund in Utah. Asset owners can consider many types of trusts, such as credit shelters.
  • Assigning the assets to the grandchildren. This process, called generation-skipping trust, avoids asset accumulation on the spouse, which may lead to taxes.
  • Gifting some of the assets up to the exempted amount
  • Getting life insurance, of which the policy amount is equal or more than the possible worth of the assets. The family can use this in case they need to settle a tax liability later.

Taxes can be confusing, overwhelming, and even frightening for a lot of Americans. For peace of mind and strategy, consider working with an estate planner or lawyer. Do so before assets accumulate fast.

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