Estate tax
Estate Tax falls only on estates that exceeds the federal estate tax exemption of $11.18 million dollars. This exemption is the dollar amount that a person can give away free of tax. Your taxable assets include all of your assets, including your equity in real property, stocks, bonds, cash, retirement assets, and any life insurance proceeds payable upon your death. This may be reduced by any charitable deductions you may have. If you are married, your taxable estate includes all of your separate property and one-half the value of your community property.
But the estate tax isn't the only tax to consider. In fact, the capital gains taxes is increasingly relevant for many Californians, especially for those with highly appreciated homes.
Capital gains tax
Capital gains taxes are levied on the difference between what you purchased an asset for, called its "cost basis," and what you sold it for. When a person dies, all of their assets, such as their home and stocks and bonds that are not held in retirement accounts, are revalued to their date of death value. This is called a step-up in basis. And this step-up can save your heirs a lot of money. How you own your property matters and the type of trust you have matters.
If you are married, and did you estate plan before 2012, you probably have what's called an A/B trust. The A/B trust structure protects most people against a tax they no longer have to pay, and worse, it now creates a tax burden for many families because the assets in the B trust do not receive a step-up in basis when the second spouse dies. Only the assets held in the survivor's trust get a step-up in basis at the second death. Contact us to find out if it makes sense to simplify that trust to one that holds all the asset in one revocable trust to avoid the capital gains tax burden on your family.
Gift Tax
As of 2018, only gifts or bequests that exceed $11.18 million (the lifetime estate and gift tax exemption) are subject to gift or estate tax. Additionally, there is an annual gift tax exclusion of $15,000 per year per person.
The Ed/Med Exemption from Gift Taxes: If a person makes a direct payment for education or medical expenses to another person, no gift tax is due, and none of that person's lifetime exemptions from the gift or estate tax is uses up. These gifts are also not limited to the annual $15,000 limit. To get the tax benefit, these gifts must be made directly to an educational institution or health care provider.
529 Plans: Money in these accounts can be withdrawn to pay for tuition, books, and room and board for college and graduate school expenses. Contributions to 529 plans do not fit within the Ed/Med exemption, but they do not have to be reported if they are under $15,000 a year.