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When should an estate plan address the risk of estate taxes?

On Behalf of | Mar 21, 2023 | Estate Planning

Taxes and other financial obligations are easy to overlook during the estate planning process. People are often so fixated on how to support dependent family members or what will happen to their most valuable property that they don’t stop to think about the obligations that will remain for their loved ones to handle after they die.

Both debts and taxes typically take precedence over inheritance rights and can drastically reduce the total value of an estate. Depending on the property that someone owns and how they plan to transfer those assets to their beneficiaries, there are several kinds of taxes that could affect an Indiana estate.

For example, there might be capital gains taxes or income taxes due after the sale of estate resources by an executor or a beneficiary. For those who have valuable property to pass to loved ones, estate taxes might also be a concern. When would a testator need to consider estate taxes to minimize what their estate must pay?

When they will pass millions of dollars to others

Like most other states, Indiana does not force people to pay taxes on the property they own when they die. However, federal estate tax rules do still apply. Very large estates that include investment accounts, real property and businesses could potentially trigger estate taxes.

The federal estate tax is progressive, which means the higher the value of the taxable estate, the higher the total tax rate. The maximum estate tax rate at the federal level is 40%. Thankfully, at least in 2023, an estate has to be worth more than $12,920,000 for federal estate taxes to potentially diminish the value of the estate.

How do people avoid estate taxes?

Advance planning is key to eliminating the obligation to pay federal estate taxes. Many people make strategic gifts to loved ones for multiple years so that they can avoid both gift taxes and estate taxes. Others might add trusts to their estate plans so that they no longer directly own property.

Considering different financial risks during the estate planning process may make it easier for a testator to maximize their legacy while minimizing their obligations. Speaking with a legal professional can help interested individuals in achieving this goal.