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How should you plan for estate taxes?

On Behalf of | May 4, 2021 | Uncategorized

The estate planning process in California presents you with several opportunities to preserve assets to pass on to beneficiaries. This includes setting up a trust to avoid probate or putting plans in place to settle debts prior to your death. You may think, however, that there is no way for you to avoid having to pay estate taxes.

However, that may not be the case. Indeed, California does not impose a local estate tax on residents. Thus, the only potential tax liability you need to concern yourself with is at the federal level. Yet if you structure your estate plan correctly, you may be able to mitigate (or even avoid) that.

Understanding the federal estate tax exemption

To do this, you need to have an understanding of the federal estate tax exemption. The government adjusts this exemption annually (per the Internal Revenue Service, the exemption threshold for 2021 is $11.7 million). As long as the total taxable value of your estate comes in under that amount, it will not be subject to tax. You can also work with your spouse to extend that amount through estate tax portability.

Taking advantage of portability

Portability refers to the sharing of tax benefits between eligible parties. In the case of estate taxes, your spouse can claim the unused portion of your estate tax exemption. If you plan to leave your entire estate to your spouse, then that amount passes on to them free of taxes due to the unlimited marital deduction. This preserves your entire estate tax exemption. Your spouse can then claim that by filing an estate tax return within nine months of your death (effectively doubling their exemption). They must remember to take this step, however, as the process of portability is not automatic.