Estate Tax Rules of Thumb

One of the questions I am regularly asked is,”Will my spouse/relatives/children get taxed on their inheritance?” The answer varies in each circumstance, but here some rules of thumb regarding estate tax:

  • Spouse: If your spouse is a U.S. citizen, they will not be taxed on your assets.
  • Children: Children-and anyone else to whom you leave your assets-will be taxed on the amount you leave them over $5 million. Unless Congress renews the law, the amount will drop to assets over $1 million in 2013.
  • Grandchildren: Grandchildren who directly inherit are charged a generation-skipping transfer tax. A “skip person” is one who is two or more generations below the transferor (in our example, the deceased). However, if the money goes directly to pay for medical bills or education expenses, the tax can be avoided.
  • Gifts: Remember, you do not have to wait until you pass to give money to friends and family, up to $13,000 year can be given to an individual tax-free during your lifetime.

People also erroneously believe that holding assets in a trust instead of using a will document can avoid taxes. This is generally untrue. The real benefit for the average family of holding items in a living trust instead of a will is that it can avoid probate.

For assets that exceed $5 million, or $1 million should the law not renew, proper estate planning may save you significant tax dollars. If you are beginning to plan your estate, please consult a Bay Area estate planning attorney in order to ensure that you can avoid pitfalls and take advantage of the many benefits proper planning can provide.