How do estate taxes work?
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How do estate taxes work?

| Jan 12, 2021 | Estate Planning |

If you expect to leave assets to your loved ones, you may have concerns about the taxes they will pay on your estate. While North Carolina no longer has an estate tax, your assets may be subject to federal taxes.

Review the federal tax guidelines as you plan your estate so you understand what to expect.

Taxable property

If you die in 2021, your estate must pay federal tax if the value of the gross estate exceeds $11.7 million. The IRS defines the gross estate as all assets, including cash, real estate, trust and investments, minus certain deductions. These deductions usually cover charitable giving, property inherited by your spouse, the cost of administering your estate, and the mortgage and other qualifying debts.

Tax rates

Generally, the first taxable $1 million of your estate will be subject to 18% to 39% percent tax. The IRS will tax the remainder of your taxable estate at 40%. For example, if you leave $5 million to your children and your rate is 20% on the first $1 million, the tax bill will be about $200,000 on the first million and $1.6 million on the other $4 million.

Various strategies can help you reduce the size of your estate to limit your descendants’ tax burden. The estate planning process can identify these opportunities, such as transferring property directly to your surviving spouse, making gifts to children and grandchildren during your lifetime, and establishing trusts for your beneficiaries, business interests, and charitable giving needs.