Nobody likes thinking about taxes. For one thing, the process of filing for taxes can be incredibly complex and time-consuming, as well as actively expensive in some cases. For another thing, some people don’t always know whether they’ll receive a tax refund when they file their tax returns, or if they’ll end up owing more than they receive. You need to be financially prepared, as much as you can be, for what you’ll receive back when you file your taxes. The only way that you can be prepared is if you educate yourself about your taxes and how you file your taxes.
Part of this is going to involve educating yourself about estate taxes. A lot of people don’t even understand what falls under the admittedly complex realm of estate taxes. The fact is too that if you’re relatively young and still making your way in the world, you may not feel as if you have much of an estate to begin with, and therefore you won’t think much about what might happen if you suddenly inherit an estate or part of an estate. Ideally, you won’t have to worry about inheriting anything in the near future. But whether you have much to your name yet or not, you still need to understand estate taxes. Educating yourself will allow you to maximize your tax benefits while at the same time ensuring that you’re filing as you should.What Are Estate Taxes?
When it comes to estates, there are certain tax exclusion limits that are set by law. If the value of an estate exceeds those exclusion limits, then those estates will be subject to estate taxes. An estate tax essentially acts as a levy placed on estates of such value. But the entire estate is not going to be subject to estate taxes. Rather, the amount of the estate that exceeds that minimum exclusion limit will be taxed.
But how are these exclusion limits determined? Perhaps you paid for a property without recognizing its true value; you may be shocked to find that it’s subject to estate taxes. These limits, as well as the estates subject to estate taxes, are calculated based on the fair market value of the estate.
Normally, estate taxes will come into play after an individual inherits an estate or part of an estate from another person that passed away. The taxes will be put upon the estate by the state in which the deceased person was living at the time of their death. As you can imagine, considering the various laws surrounding inheritance among other things, estate taxes can be quite complex. But in general, you should remember that if an estate is over $10,860,000 for married couples and $5,430,000 any amount in excess of these values will be subject to estate taxes.
What Are Federal Estate Taxes?
But wait; what about federal estate taxes? How do they work? Firstly, let’s examine the unlimited marital deduction. The unlimited marital deduction means an estate tax will not apply to assets that are transferred from a deceased spouse to their surviving partner. But then, if the surviving spouse then dies, those that inherit their estate will then likely need to pay estate taxes on the amount of the estate that exceeds the exclusion limit.
There are several benefits to these exclusions on a federal level. The maximum federal statutory rate is 37%, which is much higher than what is effectively the U.S. estate tax rate. This is precisely because of exclusion limits. In 2021, the exclusion limit is $11.7 million, which means that an estate that is worth $14 million would only have taxes applied to $2.3 million worth of the estate. This is regardless of what the estate is made up of, as well. For example, if much of the estate is made up of vehicles like cars and motorcycles, the exclusion limits can still be applied through the assessment of the estate. More people have large estates than you might think, with women making up 19% of all motorcycle owners in the U.S. as of 2018; and though not all motorcycle owners necessarily own a fleet that makes up part of a large estate, many do.
How Do State Estate Taxes Work?
Even if an estate isn’t taxed federally, it could still be taxed on a state level. In any jurisdiction, an estate that is worth less than $1,000,000 will not be taxed. But generally speaking, state and district estate tax exemptions are less than half those of the federal exclusion.
If an estate exceeds a certain threshold, taxes will then usually be assessed on a sliding scale. If an estate is just over the threshold, then the tax rate will often be around 10%, and then rise as needed, maxing out at 16%.
Can Intellectual Property Be Taxed?
In some cases, an estate may actually include intellectual property. While intellectual property is not physical property, it can potentially be taxed if it is a capital asset. A capital asset, for example, can include cars, but it can also include more theoretical concepts like stocks and yes intellectual property.
Certain types of intellectual property that fall under the classification of capital assets include patents, copyrights, trade secrets, and industry knowledge. While some of these things can be easier to bequeath in an estate than others, patents certainly can be inherited. Patents have long been extremely valuable, with the first patent for roller conveyors being given in 1908 Indiana; imagine what that patent is worth now!
Similarly to physical property, capital assets can be assessed in terms of their value and then subjected to estate taxes. It’s incredibly important for those bequeathing either these items or others to discuss tax responsibilities with their heirs. But it’s also important for those that inherit large estates to work with financial advisors. Financial advisors can help you determine how best to handle your estate taxes in a way that is most advantageous to you.
Estate taxes are complex and can be difficult to navigate. But there are ways for you to work with estate taxes in a way that keeps you from losing more money than you must.