Effective estate planning requires a big-picture perspective. Testators need to consider how an inheritance might affect their heirs or beneficiaries. They need to consider how their assets may appreciate in value and how inheritances could affect family dynamics.
In some cases, they may need to strategically plan in advance to eliminate or at least minimize estate tax obligations. While Texas does not collect an estate tax, residents of the Lone Star State could be subject to federal estate taxes.
People who understand how costly federal estate taxes can be may understand why planning in advance for those taxes is so important.
The federal estate tax rate is progressive
It is challenging to predict an estate’s exact tax burden, as the tax rate that applies isn’t a flat rate. Instead, the tax rate varies depending on the overall value of the estate. The lowest federal estate tax rate is 18%.
As the amount by which the estate exceeds the federal exemption threshold increases, so does the federal tax rate. Any estate that is $1 million or more above the threshold established for federal income taxes could be subject to a 40% tax rate.
A significant portion of an individual’s resources may end up liquidated to pay federal taxes instead of heirs or beneficiaries without prior planning. Those with valuable assets may need to strategize to protect those resources after they die.
A thorough estate plan can address tax risks in addition to identifying the people who should inherit the specific resources. Learning more about the financial complications that can undermine a legacy can help people create effective estate plans that reduce losses to taxes and other financial obligations.