Once their 401K plan and IRAs are set up, many Gen Z’ers turn their attention to their parents’ financial planning. They want to make sure their parents have also maximized their tax savings, so they can get the most out of their inheritance. Forbes’ recent article entitled “What Gen Z Needs To Know About Estate Taxes” tells us what this savvy generation needs to know about the estate tax.
The estate tax, also known called “the death tax,” is a completely different tax than income tax. Income tax is a yearly tax on your income earned during that year.
The estate tax is a one-time tax on a person’s assets after they die. It’s due nine months after a person dies, if certain monetary thresholds are met. There are two types—state and federal.
When a spouse dies and leaves everything to the surviving spouse, there’s usually no estate tax due However, returns would need to be filed.
The government doesn’t want the surviving spouse to be a ward of the state. The surviving spouse will have access to the funds to live on and then they’ll be taxed after both spouses die. Therefore, estate taxes will need to be paid after both spouses die and before the assets are distributed to the children.
Another way to save on would be to start a gifting program. Any person can gift up to $15,000 a year to a person with no tax consequences. A husband with two children could gift $15,000 to each of his children, and his spouse could do the same. As a result, this would transfer $60,000 on a yearly basis to the next generation with no tax consequences.
There’s also the federal estate tax. In 2021, that tax is imposed on estates with assets at or over $11,700,000. However, in 2026 the exemption amount drops to $5 million (adjust yearly for inflation). The federal estate tax rate is a whopping 40%.
Fortunately Texas does not have an estate tax. However, in states like Washington and Hawaii, rates can be as high as 20%. This is independent of the federal tax. There are a number of states, like Massachusetts, that collect 16% (New York, Minnesota, Oregon, Illinois, Rhode Island, Maryland, Vermont, and D.C.). Connecticut and Maine’s rate is 12%. Every state with estate taxes has a different exemption level, so talk to an experienced estate planning attorney about how to proceed.
Reference: Forbes (Aug. 10, 2021) “What Gen Z Needs To Know About Estate Taxes”
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