Inheritance and Estate Taxes: What Young Families Should Know
Navigating the complexities of inheritance and estate taxes can be an overwhelming task for young families. The transfer of wealth can involve both federal and state taxes, which vary greatly depending on the location and the size of the estate.
Whether you’re considering leaving an inheritance for your children or expecting to receive one, understanding these taxes is crucial to ensure that as much of the estate as possible is preserved. This article aims to provide a clear understanding of inheritance and estate taxes, their implications, and how an experienced estate planning lawyer can help you.
Summary:
- Understanding Estate Taxes
- Estate Tax vs. Inheritance Tax
- Importance of Estate Planning for Young Families
- Estate Planning Strategies to Minimize Taxes
- Tax Implications of Inheriting Assets
- Wisconsin Considerations for Estate Planning
- Wauwatosa Estate Planning Attorney
1. Understanding Estate Taxes
Estate taxes, sometimes referred to as the “death tax,” are levied on an individual’s estate before the assets are distributed to the heirs. The federal government imposes an estate tax, but only on estates exceeding a certain value. As of 2023, the federal estate tax exemption is $11.7 million for individuals and $23.4 million for married couples. This means if an estate’s value is below these thresholds, it won’t owe any federal estate tax.
However, it’s important to note that several states also impose their own estate taxes, and their exemption thresholds can be lower than the federal level. Estate tax rates can be quite high, reaching up to 40% at the federal level, which underscores the importance of estate planning to minimize tax liabilities and preserve wealth for future generations.
2. Estate Tax vs. Inheritance Tax
Estate taxes, as mentioned above, are imposed on the total value of a person’s estate – including all property, cash, stocks, and other assets – before it is distributed to the heirs. The federal government levies an estate tax, but only on estates exceeding a certain value.
Inheritance taxes are paid by the individual who inherits the property or assets. Unlike estate taxes, inheritance taxes are not federally imposed and only come into play in a handful of states. The rate of taxation can vary depending on the relationship between the inheritor and the deceased. For instance, immediate family members may be taxed at a lower rate than distant relatives or non-relatives.
3. Importance of Estate Planning for Young Families
Estate planning is important for young families, even though it might seem like a concern reserved for later years or for those with significant wealth. The reality is that estate planning goes beyond preparing for the distribution of assets after death. It’s about ensuring the financial security and well-being of your loved ones in the event of unforeseen circumstances.
An estate plan will protect your family’s future in many ways, like choosing legal guardians for minor children, creating trusts for your children’s inheritance, and designating beneficiaries for retirement accounts. It also involves strategies to minimize estate and inheritance taxes, which can significantly erode the value of the estate.
4. Estate Planning Strategies to Minimize Taxes
There are several strategies that young families can employ to minimize estate taxes and protect their wealth. One strategy is gifting, which involves gradually transferring wealth to family members during your lifetime. Under current tax law, individuals can gift up to $17,000 per person per year without incurring any gift tax or affecting their lifetime gift and estate tax exemption.
Another strategy is funding a 529 or custodial account for children’s education expenses. Setting up irrevocable trusts can also help shift assets out of the taxable estate.
5. Tax Implications of Inheriting Assets
Inheriting assets can come with significant tax implications, which young families need to understand for effective financial planning. Firstly, inheritance may be subject to inheritance tax, particularly if it’s from a non-immediate family member. However, it’s important to note that inheritance tax is not federally imposed and only applies in certain states.
Secondly, while you generally don’t owe any income tax when you inherit cash, there could be liabilities if you receive cash payments that would have been taxable for the deceased.
Additionally, if you inherit assets like property or stocks, you typically won’t owe taxes until you sell those assets. The tax you’ll pay upon selling is known as capital gains tax, which fortunately isn’t as severe as income tax.
Understanding these tax implications can help young families make informed decisions about managing inherited wealth and potentially reducing their tax burden.
6. Wisconsin State Considerations
Estate planning in Wisconsin involves understanding the tax rules for estates. Unlike many other states, Wisconsin does not have an estate tax.
There is also no inheritance tax in Wisconsin for descendants dying on or after January 1, 1992. Thus, in most cases, a Wisconsin resident who inherits property within the state would not owe any state inheritance tax.
This lack of state-level estate and inheritance tax is beneficial for young families planning their estate, as it can help preserve more of the estate’s value for the next generation.
7. Wauwatosa Estate Planning Attorney
For young families in Milwaukee, Wauwatosa or nearby areas, Margerie Law offers comprehensive estate planning services to help protect their wealth and loved ones. As an experienced estate planning attorney, Margerie Law can provide guidance on tax-efficient strategies tailored to your unique needs and goals.
Contact us today for a professional Wauwatosa estate planning attorney to schedule a consultation and take the first step towards securing your family’s financial future.
By Paul Margerie, Owner of Margerie Law
Paul Margerie of Margerie Law is a knowledgeable and experienced estate planning attorney based in Wauwatosa, WI. With years of experience helping families and individuals with their estate plans, he offers a gentle touch that puts his clients at ease. He understands the sensitive nature of this work and ensures that all details are taken care of with precision and accuracy. He strives to help each client achieve peace of mind that their future is protected by providing personalized advice and creating tailor-made solutions that fit their individual needs.
