What You Need to Know about Federal Estate Tax

When planning how an estate will be distributed, many people wonder how taxes will come into play. Federal estate taxes can indeed be a confusing subject, mostly because there have been so many changes to their structure in the last few decades. 

Understanding how estate taxes work, when they apply, and whether they are likely to change in the future can give you a greater understanding of what will happen to your assets when you are no longer around.

What Is the Federal Estate Tax Exemption?

The federal estate tax only comes into effect when you pass on assets in excess of a certain threshold after you pass away. This is known as the federal estate tax exemption. Currently, in 2022, that amount is $12.06 million. This figure is subject to change in line with the rate of inflation each year until 2026. 

It is important to note that each individual may also need to take into account gifts that they have made over their lifetime, but only if any of those gifts exceeded $16,000 (the 2022 federal gift tax exemption limit) to any individual other than their spouse in any given year. Any amount beyond that would be deducted from the federal estate tax exemption.

For example: if you gave $18,000 a year to your child for the last three years, you would have exceeded the gift tax exemption by $2,000 each of those years. This means that your federal estate tax exemption would be reduced by $6,000 ($2,000 x 3 years).

Which Assets Are Subject to Federal Estate Tax?

Federal estate taxes apply to the gross taxable estate. This includes:

  • Trust assets
  • Assets held in the decedent’s name
  • Jointly held property
  • Accounts that designate a beneficiary
  • Life insurance
  • Annuities

What Happens after 2026?

The vast majority of Americans do not have to worry about having to pay estate taxes at the moment because very few people will be passing more than $12 million dollars in assets on to their heirs. However, this may all change in 2026. Under current laws, the federal estate tax exemption will revert back to $5.6 million per person, which will catch many more estates in the tax net. 

It is possible, however, that Congress will act sooner than that to lower the exemption to another amount, possibly even lower than $5.6 million. Some pundits predict that this is entirely likely due to the huge deficits the government is currently running. 

For this reason, many estate planners suggest that you begin a program of gifting as soon as you can before the exemption levels come back down.

Speak with an Experienced Sacramento Trust Attorney

Whether you already have an estate plan in place or you are just starting to put one together, speaking with an experienced Sacramento trust attorney will give you the information you need to optimize your plan. They will keep you abreast of any changes in tax law and can offer you guidance about how you and your family can make the most of your assets now and in the future. 

If you have specific questions, contact our Sacramento attorneys at Copenbarger & Copenbarger at (800) 244-8814 to schedule a consultation. We can assist you at one of our many law firms located throughout the state of California.

If you have any further questions about asset protection planning and strategies to shield your wealth, or if you’d like to have your current asset protection plan reviewed to make sure it still meets your needs, please contact us at our California asset protection office at 800-244-8814 to set up a consultation.

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