Estate taxes, also called death taxes by some, only apply to estates of a certain size. There are different limits for the gross value of an estate at both the state and the federal level that impact whether heirs and beneficiaries have to pay taxes out of the estate proceeds.
Understanding state and federal estate taxes can help you determine what planning efforts are necessary for your estate to limit its potential tax liability at the time of your death. The greater the overall value of your estate, the more important planning for the tax implications becomes for your legacy and the people you love.
What size estates have to pay state and federal estate taxes?
Each state has its own rules on estate taxes. Some states won't collect them, regardless of how large an estate is. When it comes to Maryland state estate taxes, estates with a gross value of more than $5 million in 2019 will be subject to estate taxes at the state level. That amount is up from $4 million in 2018.
However, even though some individuals may have to pay that state estate tax, they will have to have significantly more assets before federal estate taxes become a concern. As of 2019, an individual's estate has to be worth $11.4 million in order for federal estate taxes to apply.
Those taxes can really reduce the potential legacy a person leaves behind. Individuals who accrue sizable assets over the course of their lives often employ a variety of strategies to mitigate their tax liability upon death.
Gifts to heirs and loved ones while you live can decrease the estate
If you want to ensure that the people you love have the benefit of the assets you earned, why not start distributing those assets while you are still alive? If you have a substantial enough estate to worry about estate taxes, then gifting some of your assets to your loved ones now won't impact your own financial stability.
You can make generous gifts to your loved ones every year, up to $15,000, without them facing taxes as a result. Over the course of several decades, you can disperse a substantial amount of wealth to the people you love using this tactic.
Trusts are another way to protect assets and avoid tax
The creation of one or more trusts as part of your estate plan could also help you limit or even eliminate the tax obligations for your estate. This is especially important if gifts won't adequately reduce the overall value of your estate.
If you hope to leave assets for your loved ones without any corresponding financial obligation or tax debt, you will need to plan carefully if your estate is of a certain size.