Understand What You Need to Know About Estate and Probate Taxes in 2023

Understanding the most up-to-date estate and probate tax regulations is crucial to ensure assets are efficiently transferred to intended beneficiaries while minimizing tax liabilities. Changes to federal and state estate and probate tax laws, including the increase of the federal gift/estate tax exemption and GST tax exemption from $12,060,000 to $12,920,000, have made it essential to stay informed about estate and probate taxes in 2023.

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What You Need to Know About Estate and Probate Taxes in 2023

With the changes in federal and state estate and probate tax laws, understanding the most up to date regulations is essential. Knowing what kind of taxes will be applied to estates and what steps must be taken to ensure they are properly filed, can help ease the transition into the future of estate planning. Moreover, keeping abreast of the latest estate and probate laws can also help individuals maximize their wealth transfer strategies. Ultimately, staying informed about the latest changes in estate and probate laws can help individuals ensure that their assets are transferred smoothly and efficiently to their intended beneficiaries while minimizing tax liabilities. In this article, we’ll provide you with the key information that you need to know about estate and probate taxes in 2023.

Before we get started here are some terms you should know.

Terms To Know:

Probate – the legal process of transferring a deceased person’s assets to their heirs or beneficiaries.
Estate Tax – a tax imposed on the value of a deceased person’s estate prior to it being distributed to beneficiaries.
Gross Estate – the total value of all of a person’s assets, including cash, real estate, investments, and other personal belongings, at the time of their death.
Executor the person appointed by a court to manage and distribute the deceased’s estate according to the terms of the will.

What You Need to Know About Estate and Probate Taxes in 2023

In 2023, significant changes were made to the federal estate tax laws, affecting probate taxes and estate planning. Effective January 1, 2023, the federal gift/estate tax exemption and GST tax exemption increased from $12,060,000 to $12,920,000, marking an $860,000 increase. Additionally, the federal annual exclusion amount rose from $16,000 to $17,000.

Taxes To Receiving Inheritance Or A Distributing Assets Through a Will.

For individuals who pass away in 2023 with an estate worth $12.92 million or less, there is no need to worry about federal estate tax. However, estates valued above this threshold will be taxed only on the amount exceeding $12.92 million. Estates whose value surpasses the exemption amount are subject to a federal estate tax rate of 40% in 2023. The total value of an estate is determined by the fair market value of the decedent’s assets at the time of death, not when they were purchased.

When Is an Estate Tax Return Required?

In 2023, the exclusion amount for estate tax is $12.92 million for an individual and $25.84 million for a married couple. This means that if someone passes away in 2023 and their estate is worth $12.92 million or less, they will not be subject to federal estate tax. However, any estates worth more than this threshold will be taxed only on the amount that exceeds $12.92 million.

State Taxes 2023

At the state level, Illinois increased its estate tax exemption under the Illinois Estate and Generation-Skipping Transfer Tax Act. For individuals who pass away on or after January 1, 2023, the exclusion amount is now $8,000,000, up from the previous $4,000,000.

It’s also crucial to be aware of state-level estate taxes. Even if an estate qualifies for the federal estate tax exemption, it may still be subject to a state-level tax. As of 2023, Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Massachusetts, Maine, Hawaii, and the District of Columbia all levy estate taxes. The estate tax thresholds in these states vary, with Oregon and Massachusetts having a $1 million threshold and Connecticut having a $9.1 million threshold.

Estate Tax Exemption Sunset 2026

Families with current lifetime estate of up to $11.2 million are currently exempt from federal Estate Taxes thanks to the Tax Cuts and Jobs Act (TCJA) sunsets. However, the exemption decreases in 2026 when the TCJA sunsets and the exemption is set to decrease to $5 million. This could have a major impact on families who have wealth beyond $5 million.

Gift Taxes?

Gifts are typically used as a handy tool during estate planning. It’s no secret that you can ‘gift’ away assets. But like everything else there are taxes and regulations on how much you can give away

You and your spouse can each gift up to $17,000 to each child and grandchild, totaling up to $204,000 in tax-free gifts. This can be a valuable way to transfer assets to loved ones while minimizing estate taxes.

It’s worth noting that the annual gift exclusion is per recipient, per year. This means that you can gift up to $17,000 to as many individuals as you choose without incurring any gift tax. However, if you exceed the annual exclusion limit in a given year, you may be subject to gift tax on the excess amount. These amounts are set by asset class and by state, we recommend discussing with a tax professional to be sure.

There has not been much discussion here from legislation recently, but it’s worth wile to keep an eye on the trends here as we move through uncertain financial times.

Estate Tax Calculator

As we head through 2023, it is crucial to understand how estate and probate taxes may impact your estate planning. Estate taxes are taxes on the transfer of property after an individual’s death, while probate taxes are associated with the process of administering a deceased person’s estate. It is important to note that estate tax rates vary from state to state. Therefore, when using an estate tax calculator, it is essential to select one that considers the specific estate tax laws in your state. Failing to do so could result in an inaccurate estimate of your estate tax liability.

We really enjoy using this free tool at calculator.net https://www.calculator.net/estate-tax-calculator.html

To use an estate tax calculator, you will need to input information about your assets, such as cash, real estate, investments, and personal property. You will also need to provide information about any debts owed and whether you have made any charitable donations or gifts. Once you have entered all the relevant information, the calculator will estimate your estate tax liability.

Not feeling up to it? I would grab and accountant..

The Differences Of Estate, Gift, Inheritance and Probate Taxes.

Estate Taxes – Estate taxes are federal taxes that are imposed on the transfer of assets from a deceased person’s estate to their heirs or beneficiaries. The federal government levies estate taxes on the fair market value of the deceased person’s assets at the time of their death. This includes real estate, cash, stocks, bonds, and other investments. Want to know if you’re exempt? [anchor to exemptions]
Inheritance Taxes – Inheritance taxes are state-level taxes that some states impose on the property that is inherited by the heirs or beneficiaries. Inheritance taxes are different from estate taxes because they are imposed on the person receiving the inheritance, rather than the estate itself. Some states have no inheritance tax, while others have both an estate tax and an inheritance tax. If you live in a state with an inheritance tax, it’s essential to understand how it works and whether there are any exemptions or deductions available.
Probate – Probate is a legal process that occurs after someone passes away. It involves the distribution of a deceased person’s assets and settlement of their debts under the supervision of a court. The probate process verifies the validity of the deceased person’s will, and if there is no will, it determines how their assets will be distributed according to state law. Probate involves several steps, such as identifying and appraising assets, paying debts, and distributing remaining assets to heirs or beneficiaries. It can be a lengthy and complex process, but it’s an essential part of settling an estate after someone passes away. Taxes may occur here but where this commonly gets mis construed is that probate is the process, not tax.

Estate Taxes vs. Inheritance Taxes

The primary difference between estate taxes and inheritance taxes is who pays them. Estate taxes are paid by the estate, while inheritance taxes are paid by the person who inherits the property. Additionally, estate taxes are federal taxes, while inheritance taxes are state taxes. Another difference is that estate taxes are based on the total value of the deceased person’s assets, while inheritance taxes are based on the value of the property that is inherited.

What Is The Future Of Estate Tax?

The future of estate taxes in the US is closely tied to political and economic factors. The current exemption amount of $12,920,000 per person or $25,840,000 for a married couple, which took effect on January 1, 2023, is set to increase annually to keep up with inflation. However, with changes in government leadership and priorities, it’s possible that the exemption amount could be decreased or eliminated altogether.

In recent years, there has been ongoing debate over the fairness and necessity of estate taxes. Proponents argue that estate taxes are necessary to prevent the concentration of wealth in the hands of a few, while opponents argue that estate taxes are an unfair double taxation that can hurt small businesses and family farms. The future of estate taxes in the US will likely be shaped by these ongoing debates and the political climate in Washington.

Regardless of political changes, the increase in the exemption amount in 2023 provides an opportunity for individuals and couples to review their estate plans and take advantage of strategies to minimize or avoid potential future estate taxes. Consulting with a financial advisor or estate planning attorney can be helpful in determining the best course of action for your specific situation.

Final Thoughts

Estate and probate taxes may seem complex and daunting, but understanding the basics can help you make informed decisions about your finances in the future. With the right guidance, estate and probate taxes don’t have to be a burden. If you need help navigating these taxes or want more insight into how they may affect you, contact a tax professional today. They can provide the answers and assistance you need to make sure your finances are in order.

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