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The goal of any estate planning should be to try to ensure as many assets as possible are passed down to beneficiaries – children, heirs, or charitable organizations.
Part of ensuring that can happen is minimizing taxes on the assets of that estate.
A well-developed Estate Plan will consider multiple types of taxes, including:
- Washington State Estate Tax: Residents of Washington State are subject to an Estate Tax of 10-20% depending on the size of Estate. This tax must be paid before any assets can be passed down to children, loved ones, or charities. The State of Washington charges this tax on anyone who has more than approximately 2.2 million dollars in assets. Some clients mistakingly think that the Washington State Estate Tax does not apply to them. Remember that all of your assets – your home value and financial accounts – all contribute to your final assets. Careful planning and well-drafted documents can minimize the Estate Tax at the state level.
- Federal Estate Tax: Assets may be taxed by the Federal Government before they are distributed to your loved ones or charitable organizations. The amount varies over time, but currently, only estates larger than approximately 11 million dollars are subject to the Federal Estate Tax. Careful planning can minimize the implication of this tax.
- The Difference between the Washington State Estate Tax and the Federal Estate Tax: The values for both the Washington State and Federal Estate Tax vary across time. Currently, there is a large difference between the tax thresholds: approximately 2.2 million (the Washington State Estate Tax threshold) and approximately 11 million dollars (the Federal Estate Tax Threshold). For individuals whose net worth falls in between these two values, there are unique Estate Planning strategies that can minimize taxes and maximize what assets you can pass down to your loved ones or on to charity.
- Capital Gains Tax: If certain assets in your Estate, like your house or stocks, gain value across your lifetime, they are subject to a Capital Gains Tax. The Capital Gains Tax is a special tax on the increase in value over your purchase price. Proper Estate Planning minimizes the Capital Gains Tax by providing a “step-up in basis” to your assets. This means that more wealth is passed on to your beneficiaries.
- Gift Tax: The person who gives an asset to somebody else is taxed at the federal level on the value of that gift. This is called the gift tax. Gifting away parts of one’s estate can be a powerful way to reduce taxes at the federal level. The lack of a gift tax at the state level in Washington state provides planning opportunities.
- Generation Skipping Tax: Multigenerational gifts that are passed down across a generation, for example from a grandparent to a grandchild, can be taxed at 40% under the federal Generation Skipping Tax. Planning can significantly reduce this tax.
Our Safe Harbor Estate Planning Process asks about your assets and who you would like to benefit from your Estate. With this information, we can customize an Estate Plan that is customized to your tax concerns. We also identify issues in tax planning that you may not have considered.
The best planning is always done in advance. Contact us today to begin your Estate Planning.
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