Estate Tax Planning

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Estate Tax Planning: An Important Consideration

Some estates are subject to estate tax—or, as it is more informally known, a “death tax.” Federal estate tax rates can be as high as 40%—and that doesn’t account for any state estate tax that could be levied on your estate.

However, with the guidance of a qualified estate planning attorney, you can implement strategies to minimize the amount of tax levied on your estate at death, as well as the amount of inheritance tax that must be paid by your beneficiaries…without impacting your non-tax planning needs.

Federal estate tax considerations:

Estate tax:

If the value of your assets surpasses the federal exemption limit, you may be subject to estate taxes. As of 2022, the federal estate tax threshold is about $12M, though, by 2026, this amount will decrease to $5M with adjustments for inflation.

Gift tax:

“Gifting” money (or other assets) to heirs while you are still alive can incur taxes if your combined lifetime gifts are over the exemption limit. In 2022, the gift tax limit before being assessed a gift tax is the same as the estate tax limit, which is about $12M.

The gift and estate tax are coupled together which means that the estate tax exemption amount is reduced by the amount of gifts made during a lifetime. An exception to this rule is when the gifts are less than $16,000 (or $32,000 for married couples who agree to split their gifts). Such gifts fall under the annual exclusion, which is the amount each person can gift to any one person in a given year before they are required to file a gift tax return, and potentially be subject to gift taxes. The gift tax exemption and annual exclusion gifts change often, which is why it’s so important to regularly update your estate plan.

State estate tax considerations:

State Tax

Not all states levy an estate tax, so it’s important to work with a qualified estate planning attorney who has intimate knowledge of your state’s estate tax laws. Here in Oregon and Washington, we have an aggressive state estate tax of 10-16% (Oregon), and 10-20% (Washington) that is applied to estates valued over $1M (Oregon) and about $2M (Washington).

Frequently Asked Questions About Estate Tax

What is the federal estate tax threshold?

In 2022, the federal estate tax threshold increased to $12,060,000 to account for inflation. However, by 2026, the estate tax threshold will revert to $5,000,000 adjusted for inflation.

Does Washington state impose a state estate tax?

Yes, Washington state will levy a state estate tax—above and beyond the federal estate tax—at a graduated rate of 10-20% for estates valued at $2,193,000 or greater.

Does Washington state impose a state estate tax?

Yes, Oregon will levy a state estate tax—above and beyond the federal estate tax—at a graduated rate of 10-16% for estates valued at $1,000,000 or greater.

How much can I give to a beneficiary while I am still alive, without incurring gift taxes?

In 2022, you may give money or assets valuing $16,000 to each beneficiary per year without incurring taxes or filing a gift tax return (the annual exclusion gift). A married couple may give $32,000 if they agree to “share” the gift, even if the gift comes from just one spouse’s assets. If the total of your gifts made during a lifetime, excluding annual exclusion gifts, exceed $12,060,000 in 2022, then a gift tax will be assessed. Some states impose a gift tax in addition to the federal gift tax, fortunately, neither Oregon nor Washington states impose such a tax.

What is the difference between estate tax and inheritance tax?

Estate tax and inheritance tax are not the same. Estate tax—or death tax—is levied on your estate at the time of your death, and is paid directly out of your estate. Inheritance tax is a tax that your beneficiary may pay on assets received. Fortunately, neither Oregon nor Washington has an inheritance tax; however, the estate tax continues to be relevant even for modest estates in both Oregon and Washington.

What assets are included in an estate for estate tax purposes?

The short answer is everything, including cash, bank accounts, stocks and bonds, retirement accounts (such as an IRA and 401K), businesses, life insurance death benefits, cars, art, and personal items.

How can I reduce the amount of estate tax that will be owed?

Working with an estate planning lawyer is the best way to devise a plan for minimizing federal and state estate tax, without impacting your non-tax based planning needs and goals. Through a combination of strategies that may include gifting, charitable donations, and preparing an irrevocable trust, an estate attorney can help you minimize estate tax, and maximize the amount of your estate that can be distributed to your heirs.

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