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10 Facts You Should Know About Estate Taxing

The distribution of property is always a major issue, especially after a homeowner passes. If the deceased person has written a will or testament, the beneficiaries, or the people inheriting the property, will assume responsibility for the well-being and expenses of that property. But, in recent years, there have been additional expenses and taxes implemented onto the estates that beneficiaries must pay. This is called estate tax and though it was repealed back in 2010, it has once again been reinstated back in December of that year. Though tax exemptions exist for some people, others still have to pay this bill. Throughout this blog, we will explain estate tax and how it might impact you and your business.

The federal estate tax is based on the value of the house, and over the years, the exemption value of the property has increased drastically. This blog will go into further detail about how this tax works and what prevents a beneficiary from paying it. Apart from this, this blog will touch upon the different aspects and facts about this tax that will surely interest you and your property.

1.Tax Imposition

The value of estate tax you could be expected to pay depends on the property value of the estate you are inheriting. The property value equals the fair market value of the property as well as all of the deceased property owner’s assets. After this, a calculation is made from all of the assets. Next, estate tax deductions are made and credits are removed from the total.

2. Who Has To Pay?

Every U.S. citizen and their property is subject to federal estate tax. Within a deceased person’s testament, beneficiaries of his or her property and assets are named. The named beneficiary who inherits the estate is subject to pay this tax when the property is being transferred onto their name.

3. Tax Exemptions

As stated above, this tax is calculated and imposed based on the property value of the estate, validated by fair market value. Tax exemptions are also based on the property value of the estate. Back in 2001, the per-person exemption value was at $675,000, meaning, if the property value you were inheriting was under this amount, you did not have to pay the federal estate tax. The exemption amount has steadily increased by $500,000 dollars every year, so in 2002, the property value exemption was 1 million dollars. The following year it was 1,500,000; it has only increased.

4. Benefits For Farms and Family Owned Businesses

Supporters of the federal estate tax have argued that by doubling the amount of property value exemption, many farms and family-owned businesses would not have to pay for excess taxes. It was noted that back in 2017, only 20 small farms and businesses owed any estate taxes, and those tax rates were under 9% of the property value.

5. Unrealized Gains

A realized gain is an asset that has been sold for profit, while an unrealized gain is an asset or property which is still open and has not been sold to anyone, and this applies to inheritable property and the taxes that come as well. If an owner holds onto their property and doesn’t transfer it until their death, the beneficiary does not have to pay a federal estate tax. Unrealized capital gains are not subject to taxation.

6. Economic Proactivity

Though people argue that the estate tax only hurts people’s savings and the economy, studies have shown that the system benefits numerous parts of the economy as well as the beneficiaries themselves. The economy regenerates due to the revenue created by the tax. It also inspires beneficiaries to work.

7. If You Don’t Write A Will

If the property owner does not leave behind a will or a revocable trust, then the state’s laws will decide upon the following procedures, as well as who will inherit the property; this process is called probate. A revocable trust is a testament in which the grantor, or the person who writes the will, chooses the beneficiaries who will inherit their assets and property. If you do not write one, then the courts will disperse your property and assets according to their laws.

8. Loopholes In The System

Though most large properties are subject to estate taxes, some of those property owners hire lawyers and accountants to exploit loopholes within the system so they do not have to pay these taxes. Though it does not benefit the economy, the primary purpose of this litigation and maneuvering is so they won’t have to pay the taxes. Property owners mostly use the grantor retained annuity trusts (GRAT) to exempt themselves for the estate tax. In this trust, the property owners put a considerable amount of money into a trust that is meant to repay the estate plus interest. If the stock rises in value, neither the grantor nor the beneficiary has to pay tax.

9. It’s A Significant Revenue Source

Many experts and economists have noted that if this tax were to be repealed, it will mean a significant loss in revenue; it may equate to a loss of more than 200 billion dollars. Some even consider it irresponsible to repeal this tax and add more weight to other expenses and funds.

10. Compliance Costs Are Modest

There are compliance costs that must be paid along with the estate tax, fortunately, these costs are not too costly for individuals and small businesses. Usually, the percentage of administrative and compliance costs equates to 14.5% from individual and corporate income tax, plus 2 to 5% in sales tax.

Federal income tax may seem like a harsh payment to make, especially if a loved one has died and has left their property in your name, which you are trying to inherit. If you are a beneficiary inheriting property over 11 million dollars, there are many different facts about this tax that you should have in mind as well as many legal maneuvers you can take to lessen the strain of this cost.    

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