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Estate taxes are often one of the biggest concerns for people creating an estate plan. While not everyone will face an estate tax, it’s important to understand how it works and how you can reduce the impact it may have on your estate.
What are Estate Taxes?
Estate taxes are taxes imposed on the transfer of assets from a deceased person’s estate to their heirs. In the United States, estate taxes are levied at the federal level, and in some states, there are additional state-level estate taxes as well. The federal government only taxes estates over a certain value, and each state has its own threshold for state estate taxes.
How Much Can You Be Taxed?
As of 2024, the federal estate tax exemption is set at $12.92 million per individual, meaning that estates valued below this amount are not subject to federal estate tax. However, estates valued above this threshold will be taxed at rates ranging from 18% to 40%.
State Estate Taxes
Many states, including Massachusetts, Oregon, and Washington, have their own estate taxes with much lower exemption thresholds, so it’s important to know whether your estate will be affected by state-level taxes.
Ways to Reduce Estate Taxes
- Gift Giving: Gifting assets to heirs during your lifetime can reduce the value of your taxable estate.
- Establish a Trust: Certain types of trusts, such as irrevocable trusts, can help remove assets from your taxable estate.
- Take Advantage of the Exemption: You can take advantage of the estate tax exemption to pass on a large portion of your estate tax-free.
- Charitable Giving: Donating to charity during your lifetime or in your will can reduce your taxable estate.
Consulting with a tax professional or estate planning attorney can help you create strategies to minimize your estate tax burden.