Death may not yet be avoidable, but the death tax can be.
Let's start with the first thing to tackle when discussing estates taxes – what exactly is an 'estate'? An estate is defined as the following:
"…the total property, real and personal, owned by an individual."
So, your estate is the sum of what you own set against your liabilities (which determines your net worth).
Death triggers the estate tax
Your death (heaven forbid) is not the cause of your estate. Rather, your death is when the IRS (and most states) feel it is most appropriate to tax the things you owned during your lifetime.
Planning for your own death is something people shy away from, but tackling it head-on is so vitally important, especially for those left behind. When you die there is a lot of red tape, paperwork, and estate taxes to muddle through.
What is an estate tax, and who does it affect?
The IRS defines it as the following:
"A tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them."
The good news is that thanks to lobbying to get the exemption lowered, the federal estate tax doesn’t affect as many people as it used to. The current exemption amount for dying in 2017 is $5.49 million, meaning if your estate is worth less than that, you won’t owe any federal taxes. The bad news is that if you’re NOT exempt, the federal taxes can be as high as 40%. Not only that, but the return is due within nine months of death and it must be paid in cash.
For those that are exempt, don't breathe a sigh of relief just yet. Even if your estate is less than 2015's $5.43 million, it doesn't mean that you’re off scot-free. If you are exempt, you still have fees to pay. Don’t forget about any debts you have, state taxes (this varies state-to-state), funeral expenses, probate fees, legal and admin fees, and income taxes.
Here’s a mistake that a lot of people make. They live modestly… live in a small home, drive an old car, and don’t buy flashy things. They assume because of this they won’t owe taxes when they die. But here’s the thing – the IRS looks at what you’re worth, not your lifestyle. That’s why the IRS’s definition of estate tax says, “The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them.” We’ve seen family businesses, farms, and homes — many of which have been in the family for generations — need to be sold off just to pay taxes that no one saw coming.
Death, Taxes, and Life Insurance
When it comes to estate planning, life insurance is a really good choice for avoiding taxes. Let me explain: You buy a whole life policy that has a death benefit (NOT a term policy). Your money is invested by the insurance company, and it steadily builds a cash value. You can borrow money against it; you could even technically pay it back during your lifetime, but you don’t have to! When you die, it’s paid back by the death benefits (which are typically non-taxable).
If you need tax or estate planning assistance, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.
