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Is there a way to avoid estate taxes?

On Behalf of | Feb 1, 2021 | Trusts, Wills

As you get deeper and deeper into the estate planning process, you will inevitably begin to recognize opportunities to avoid (or mitigate) expenses against your estate. Taking action to settle liabilities before your death, covering your funeral costs and avoiding probate can help preserve many of your estate’s assets to pass on to your beneficiaries in California. Yet one expense you likely believe you cannot avoid is estate taxes.

That may not, however, be the case. California does not impose an estate tax on local residents, leaving only federal taxes as a potential liability facing your estate. Yet there are certain measures you can take that might help to avoid that expense as well.

Reviewing the federal estate tax exemption

First and foremost, however, you will want to know whether or not your estate will even be subject to tax. A federal estate tax exemption exists that allows many estates to avoid a tax liability. Per the Internal Revenue Service, the exemption threshold for 2021 is $11.7 million. Thus, if the total taxable value of your estate is below that amount, it will not be subject to tax.

Optimizing your tax strategy through portability

Married couples may be able to extend that exemption amount even further. You and your spouse can essentially share your estate tax exemption through portability. Estate tax portability allows one spouse to claim any unused amount of the other’s exemption. If you plan it right, you may be able to effectively double the estate tax exemption.

By leaving your entire estate to your spouse, you take advantage of the unlimited marital deduction, passing those assets on free of taxes while also preserving your entire $11.7 million exemption. Your spouse can then claim your exemption by filing an estate tax return within nine months of your death electing portability.