estate tax protection
Colorado Wills and Estates provides estate planning for individuals and families across Colorado. We are here to answer your questions.
Estate Tax Protection in Colorado
It takes a lifetime of hard work to amass the savings you’ll need once you retire, but it’s worth all the effort if you have enough money left over for your loved ones when time comes. Throughout life, people pay taxes for all sorts of reasons: income tax, property tax, sales tax and so on. And in the end, the government argues that the individual’s estate should have a part to cover when taxes must be paid.
Federal Estate tax
The estate tax, which is a separate entity from income taxes, is calculated and paid on the net value of your assets when you die. Fortunately, the current federal estate tax exemption is high. Therefore, most individuals and married couples will not have to worry about their estate being taxed.
Federal estate tax exemption Amount
The Tax Cuts and Jobs Act of 2017 almost doubled the federal estate tax exemption amount that individuals and married couples can apply to their estate values.
- The individual estate tax exemption increased from $5.4 million to $11.58 million and currently sits at 11.7 million.
- The estate tax exemption for married couples increased from $10.9 million to $23.16 million and currently sites at 23.4 million.
What the Federal estate tax exemption means to you
If you are single and your assets total less than 11.7 million, or are a married couple and your assets total less than 23.4 million, then you will not have to pay estate taxes. This a good thing because the federal estate tax is a condensed tax rate that tops out at 40%.
federal Estate tax Planning Strategies
If you are single or married and have assets near or above the estate tax limit, we employ federal estate tax strategies that limit estate taxes that are completely legal and allowable under the law.
Irrevocable trusts are primarily used to accomplish tax prevention strategies. The two most common taxes to avoid are income and estate taxes. Income taxes come with a high rate, as high as 39%. But rates for current estate taxes are even higher at 40%. There are various trust options which can be used to minimize or eliminate these types of taxation.
Tax planning tools
There are several tax planning trusts that we can use to eliminate and avoid the current high rate of taxation we may all face.
- Grantor Retained Trusts / (GRAT / GRUT)
- Charitable Remainder Trusts / (CRAT / CRUT)
- Charitable Lead Trusts / (CLAT / CLUT)
- Qualified Personal Residence Trust (QPRT)
- Irrevocable Life Insurance Trust (ILIT)
- Qualified Domestic Trust (QDOT)
- Intentional Grantor Trust (IGT)
Controlling your assets vs. paying a high estate tax
There are different tax saving opportunities with each of these trusts. Before you decide to create a trust, one of the primary concerns is that the creator of the trust (the person whose assets are going into the trust) must give up control over their belongings in order for it to work properly. The grantor of a trust is prohibited from making changes to the trust once it has been created and may have to give up his or her rights to either the income or principal or both of the trust. While this may seem extreme, people opt to do these to avoid the alternative of having a substantial portion of their estate going to the government in taxes.
Current estate tax exemption proposals
Even though the current estate tax exemption is at an all time high, Congress may introduce legislation to significantly reduce the federal estate tax exemption amount. In March 2021, a proposal was brought forth by several Senators to reduce the federal estate tax exemption from $11.7 million to $3.5 million. Additionally, the proposal proposes a reduction of the gifting exemption to $1 million in 2022. This proposal will require many more Americans to consider asset protection and federal estate tax avoidance strategies.
Because many more individuals and married couples will be impacted by such a dramatic reduction in the federal estate tax and gifting exemptions, the time to consult an estate planning attorney about these proposed changes and potential strategies to take advantage of the current exemption amounts is now.