Inheritance Taxes in Estate Planning

 Posted on July 16,2015 in Beneficiaries

Many people take advantage of the tax savings that estate planning options give them. Utilizing different legal options, such as trusts, will often alleviate how much a person would have to pay to the IRS in taxes for those funds. However, one of the issues to consider is whether or not the plans you are establishing will place a tax burden on your beneficiaries when you pass.

The federal tax exemption statistically affects approximately 1 percent of the country's population. The current exemption is $5.43 million for individuals and $10.86 million for couples. Yet many people fail to consider if the state they live in has required estate tax. There are 16 states, including Illinois, which levy up to a 20 percent estate tax to beneficiaries.

Funds from life insurance policies are exempt from taxes. Everything else is taxable. The only people exempt from paying these taxes are spouses. All other beneficiaries can be taxed between 10 and 26 percent for any property or funds they inherit. Domestic partners are also required to pay the same estate taxes as other beneficiaries.

There are several options people have to help alleviate the burden of inheritance tax with which their heirs could get hit. Options can include the following:

• Life Insurance: Since funds from life insurance policies are not taxable, one option may be to set up a trust and have the trust as the beneficiary of any life insurance policies you have. By setting up life insurance this way, the person maintains control of how those funds will be doled out to heirs, since the policy funds will be place in the trust and not directly to a beneficiary. This way, the benefits of a trust are being utilized without heirs having to pay any inheritance tax;
• Gifting: Under current tax laws, a person can gift someone up to $14,000 per year—$28,000 if they have a spouse—without any required gift tax needing to be paid. However, there is a $5.43 million lifetime cap on gifting; and
• Transferring Real Estate: One way to limit estate taxes on property is to place the property under the ownership of a limited partnership or in a trust.

These are only some of the options available when it comes to estate planning. A qualified DuPage County estate planning attorney can help sort through what the best options for your situation would be. Contact the Law Firm of Stock, Carlson, Flynn and McGrath, LLC at 630-665-2500 today to discuss your options.