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Should California estate plans address the risk of estate taxes?

On Behalf of | Dec 21, 2023 | Estate Tax

Every testator planning their estate has different concerns and priorities. Some people need to arrange for lifetime support for a child with special needs. Others worry about their own future medical incapacity or the possibility of creditors taking legal action against their estate. Financial obligations can significantly diminish how much of an impact someone’s estate has on their selected beneficiaries.

Not only are personal debts likely to affect someone’s legacy, but there could be taxes that diminish the value of the estate as well. Many estates may need to cover income taxes owed by both the deceased individual and the estate itself if the personal representative sells estate resources and generates more than $600.

Estate taxes are another major financial obligation that some estates will need to pay before distributing any assets to an individual’s heirs or beneficiaries. When do adults in California need to plan to minimize estate taxes?

The largest states could be at risk of massive tax bills

California is one of 38 states in the United States of America that do not currently assess an estate tax. People who learn that fact sometimes take for granted that they can bypass planning for tax minimization when thinking about their future legacy. However, there could still be federal estate taxes that could apply. The highest federal estate tax rate is a shocking 40%! Up to two-fifths of someone’s estate could end up in the coffers of the federal government instead of in the hands of their loved ones without proper advance planning.

Thankfully, the threshold for federal estate taxes is relatively high. The estate must have a total value of $13,610,000 as of 2024 for federal estate taxes to be a concern. Gifts and sizable transfers made in the three years prior to someone’s death do contribute to the value of their estate, as well as any resources solely in the decedent’s name at the time of their death.

Estate tax planning may involve making gifts to loved ones or transferring assets to a trust. Those who anticipate having millions of dollars in property when they die may need to plan carefully to minimize those tax obligations. Recognizing concerns that could diminish someone’s legacy, and seeking legal guidance accordingly, is an important component of modern estate planning.