The estate tax is a tax imposed on a person’s assets after death. California does not have an estate tax, but there is still a federal estate tax that might need to get paid.
In preparing your estate plan, you should determine if your estate will owe tax and how to deal with it.
Exemption amounts and planning
The federal estate tax is only due on an estate when the total value exceeds $12.06 million in 2022. This is an exemption amount for each individual. Married couples can pass an unlimited number of assets to their spouse on death and can set up certain trusts that will allow each spouse a full individual exemption to effectively double the exemption amount.
Tax rates on an estate increase as the total value over the exemption amount rises. The rates start at 18% and go up to 40% for estates that have a value of more than $1 million over the exemption amount.
Paying the tax
If you know that your estate will owe federal tax, you may want to plan how that tax will get paid. You can prepare a certain amount of cash assets available to the estate for its obligations. If sufficient cash is unavailable, your beneficiaries may have to liquidate other assets, such as a business or real estate, to pay the tax.
You probably want as much of your hard-earned wealth to go to your beneficiaries as possible. It is essential to plan for estate taxes to avoid paying more tax than necessary.