Estate taxes can negatively impact the legacy a person leaves after they die. While California doesn’t have a state estate tax, large estates can be vulnerable to federal estate taxes. Individuals who are already aware that their assets are worth millions of dollars likely want to establish an estate plan that includes asset protection and tax planning strategies.
Additionally, those with any of the three assets below may need to consider tax planning due to fluctuations in asset values. What types of assets are likely to make an estate vulnerable to estate taxes?
1. Real property
Primary residences, vacation homes and investment properties can be worth millions of dollars apiece. Real estate holdings directly owned by the deceased individual can push the total value of their estate over the exemption threshold, leading to a costly estate tax burden.
2. Business holdings
Although overall company revenue might be well below the current threshold for federal estate taxes, the fair market value for the business may be much higher than the annual gross revenue it generates. Businesses can contribute substantially to the overall value of an estate.
3. Investment holdings
A variety of different types of investments, from stocks to cryptocurrency, fluctuate in value in the short term while often slowly appreciating in value over time. Well-funded and diversified investment portfolios can theoretically contain enough assets to put an estate at risk of federal estate taxes.
Taking on co-owners, arranging for a transfer outside of probate court or even using assets to fund a trust are all ways to preserve those resources while minimizing the likelihood of costly estate tax obligations. Reviewing estate tax concerns with a legal professional can help testators ensure that their resources pass to their beneficiaries rather than federal tax authorities.