Frequently Asked Questions
TAXES
The Basics
1. A federal estate tax is imposed upon the fair market value of the total of your assets less certain deductions. The easiest way to compute the value of your assets is to add your net worth to the face amount of life insurance. Both probate and non-probate property are subject to estate tax. This includes assets held in joint tenancy, living trust assets, life insurance, and retirement plan proceeds. A common misconception is that life insurance proceeds are not taxed. 2. You may pass a certain amount to others free from estate tax at death (the "exclusion amount"). Currently, the exclusion amount is approximately $13,990,000 per person. You will pay an estate tax only if your assets are over the exclusion amount. 3. Estate tax law provides that your spouse may receive any amount free of estate tax. This is called the "unlimited marital deduction." 4. Colorado does not have a separate estate or inheritance tax.
Will my beneficiary pay income or estate taxes?
Assets received by a beneficiary from an estate or from an insurance contract are not subject to income tax. However, because income taxes on qualified retirement benefits have been deferred, these proceeds will be subject to income tax. There are, however, favorable roll-over rules for spouses. Estate taxes are paid by the estate prior to distribution and may or may not be allocated to a beneficiary, depending on the terms of your will.
How can I reduce my estate taxes?
1. Married Couples. If you are married, you can reduce estate taxes. However requires the correct estate planning provisions. In addition, upon the death of a married spouse, he or she may elect to preserve the deceased spouse’s unused exemption. 2. Gifts to Children and Grandchildren. If you have a large estate, lifetime gifts to children and grandchildren may be appropriate to reduce your eventual estate tax. You may give $19,000 (indexed for inflation) ($38,000 for married couples) annually tax free to any number of individuals. Tuition and medical payments are also tax free if the payment is made directly to the institution or medical provider. Currently, you also may give approximately $13,990,000 without estate or gift tax during your life. 3. Irrevocable Insurance Trusts. If insurance is owned by an irrevocable insurance trust, the insurance can escape taxation at the death of both spouses. 4. Gifts to Charities. Assets given to a charity are excluded from taxation at your death. Gifts may be made in your will, but there are also ways to give these gifts during your life and still receive the income from these assets. 5. Limited Liability Companies. A limited liability company (LLC) should be considered if you would like to bring family members into a business or start a gift giving program for assets that are difficult to divide, such as real property. A discount can often be applied to gifts of partnership or LLC interest to children, resulting in larger gifts, greater reduction of your estate, and less estate tax. 6. Generation Skipping Tax Trusts. Generation skipping tax (GST) trusts can be established for children. The GST trusts generally protect against creditors (including a child’s spouse) and will not be taxed at a child’s death. This trust runs for the life of a child with the remaining trust estate passing to grandchildren. Distributions can be made for the health, support, maintenance, and education of a child and his or her children. The child may be the trustee. 7. Business Succession Planning. If you own a closely-held business, you may want to consider a buy-sell agreement. A buy-sell agreement can minimize eventual estate taxes and more importantly provide adequate security for a surviving spouse. 8. Other Planning Ideas. There are a number of ways during your lifetime to reduce estate taxes such as charitable remainder trusts, qualified personal residence trusts, grantor retained annuity trusts, spousal lifetime access trusts, and sales to intentionally defective grantor trusts.