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End of Life Planning for Estate, Gift, and Inheritance Tax

Learn about end of life planning for estate, life, inheritance taxes.

As you approach end of life inheritance planning, whether for yourself or for a loved one facing a terminal illness, you’ll need to keep in mind the taxes that you may be responsible for paying. These include estate taxes, inheritance taxes, and gift taxes. Although these terms, especially estate and inheritance tax, are often used interchangeably when referring to taxes collected after someone passes away, they refer to vastly different types of taxes.

The Estate Tax: Federal and State

The estate tax is a type of death tax calculated based on the net value of property (including cash and securities, real estate, insurance, trusts, annuities, and other assets) owned by a deceased person on the date of death. As of 2018, estates with a net value of up to $10,000,000.

On the state level, impose estate taxes of their own, with a wide range of exemptions. For example, in New Jersey, estates over $675,000 are subject to a state inheritance tax, while the exemptions in Delaware and Hawaii reach as high as $5,340,000. Most states offer a $1,000,000 exemption. State level estate tax policy varies widely; be prepared to file at the federal and state levels.

Planning for Inheritance Tax

While an estate tax is based on the value of the deceased’s estate, an inheritance tax is based on the person who receives the property. There is no inheritance tax at the federal level, and only Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania impose an inheritance tax. All of these states exempt surviving spouses from the tax. Iowa, Kentucky, Maryland, and New Jersey also exempt surviving children and grandchildren.

If you or your loved ones live in states where an inheritance tax is imposed, you may wish to carefully create an inheritance plan so as to minimize this inheritance tax.

Giving: A Powerful Estate Tax Planning Strategies

The gift tax, designed to prevent people from avoiding estate and inheritance taxes, is a little more complicated. The gift tax applies to the giver, not the receiver. As of 2018, an per recipient per year without owing any gift tax. This means that an individual could give $15,000 to each of three grandchildren – but not $45,000 to one grandchild – in one year without being subject to any gift tax.

Amounts that exceed the annual gift tax exclusion can be taken out of the lifetime estate and gift tax exemption, which shelters $10,000,000 from tax as of 2018. Of course, tapping into that exemption erodes the exemption available at the time of the person’s death.

Despite these limitations, many families are able to avoid gift tax penalties through careful planning. In addition, tuition and medical expenses paid on someone else’s behalf are exempt, as are gifts to spouses and contributions made to a political or qualifying charitable organization.

Fifth Season Financial Legacies

Many of us worry about the financial legacy we will leave our loved ones. That’s why Fifth Season Financial created the Funds for Living Program, which allows those with a terminal illness to receive an advance from their life insurance policy’s face value while preserving funds for beneficiaries to receive in the future.

If you’re interested in finding out more about how life insurance loans can help you ensure a comfortable standard of living for yourself while also leaving behind funds for your loved ones, contact us at (866) 459-1271 or contact us with the form below.

Disclaimer: Fifth Season Financial is not a financial advisor or consultant and recommends that you speak to an advisor or expert before making any significant financial decisions.

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