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6 Ways that State Tax Law Can Affect Your Estate Planning

Estate Planning and Taxation in California

Working really hard to grow your estate can be rendered fruitless if taxation eats up a huge chunk of your assets. One of the best decisions you can make is to work with an estate planning attorney in Orange County to make the process easier.

Knowing that your future and those of your loved ones are secure, it is crucial to take taxation into account when doing your estate planning.

Federal and State Level Taxation

When it comes to managing your assets, one of the biggest considerations to make is taxation both on the federal and state level.

Though Federal Tax Laws are important in governing your estate, you should never forget to consider State Tax Laws.

Depending on where you live and where your beneficiaries will be living, State Tax Laws will greatly dictate how you manage your assets and how you conduct your estate planning.

There’s incredible variation when it comes to State Tax Laws so it’s important to make sure one is keeping up with it and minimizing how much is paid in taxes for the best possible return for oneself and loved ones.

It is best to consult with an Orange County estate planning attorney to have a comprehensive estate plan that is best for your circumstances.

6 Ways that State Tax Law Can Affect Your Estate Planning

  • Estate Tax

The federal estate tax is a law that taxes estates such as property, cash, real estate, stocks, etc. before they are transferred from a deceased individual to his beneficiaries.

Though not all estates are subject to federal estate taxes given the increase in estate tax exemption, keep in mind that with variation in state tax laws, you might be subjected to estate tax instead.

Depending on where you live, some states have an additional estate tax and these usually have lower exemptions.

  • State Inheritance Taxes

When beneficiaries receive estates, they can be subject to state inheritance tax depending on which state they live in.

If subjected to it, the amount to be paid in taxes depends on the amount of the inheritance and whether it exceeds the exemption provided by state tax laws. When it goes above the limit, the rate for inheritance tax usually increases on a sliding basis, going from a single digit to as high as 15% or 19%.

Another factor to consider with inheritance tax is the relationship of the beneficiary to the deceased; generally, the closer a beneficiary is to a deceased, the lower tax rates they would incur.

In some states, spouses and domestic partners may be exempted from inheritance tax. Also, if the deceased had life insurance and it’s payable to him or his estate, the beneficiary is also subject to inheritance tax.

A good way to circumvent this is to make sure one makes their life insurance payable to a beneficiary.

  • State Income Tax

In the United States, there is a multi-tiered income tax system. While federal income tax is progressive with higher taxation for higher income brackets, state income tax can be incredibly varied.

Some states also have a progressive income tax system similar to federal income tax, while other states can impose a flat rate on everyone regardless of income size or no income tax at all.

For the states who implement a progressive income tax system, they may follow similar income brackets as federal income tax and adjust their brackets annually as a means of adapting to inflation. However, some states do not do this too.

Depending on the state, the type of income that is taxed also varies. Some tax pensions and Social Security, following federal tax laws, while some do not.

Some also only tax earned income while some also tax investment income—the rates for these also vary. 

  • Capital Gains Taxes

In lieu of state income taxes, some states will levy a tax for income generated from assets like stocks or real estate.

This is an important consideration for estates with such assets considering how much these could accumulate over time. Depending on where you live, capital gains taxes can range from zero to 20%.

This can deduct a huge chunk from some estates so planning around this is vital to any estate plan.

  • State Intestacy Laws

In most cases, people name an heir in their wills or testaments so that someone will be the beneficiary to the estate they leave behind when they die. To understand this better, you may consult with an estate planning lawyer in Orange County.

The beneficiary may or may not be a relative or a spouse. When there’s a will or testament, things can be quite simple but this may not always be present. There are situations where a deceased was not able to name an heir or beneficiary and an intestate succession takes place.

In intestate successions, the beneficiary of the estate of the deceased will depend most commonly on the intestacy laws of the state where the deceased had lived. Other times, it depends on the intestacy laws of the state where the property was located at the time when the deceased died.

There are also instances where intestacy laws from both states would apply and this is when things can get a bit confusing.

When determining the heir of a deceased, most intestate laws will group possible heirs by classes to help determine the order of succession and share size per individual heir.

All fifty states in the US have different provisions for intestate successions and it’s very important for you to understand them so you can conduct your estate planning accordingly.

  • State Gift Tax

Another way to minimize taxes incurred from estate tax is by giving assets away in the form of gifts.

When doing this, one will be subject to federal gift tax which charges up to 40% in taxes that exceed the annual exclusion gifts, with a limit of $15,000.

Until 2013, there was no state gift tax. However, at present, a handful of states have begun implementing their respective state gift taxes on top of the federal gift tax.

Learn More about  State Tax Laws for your Estate Planning

All these state tax laws can accumulate to a huge chunk of your estate and significantly diminish the value that your beneficiaries will receive.

It’s highly advisable that you consult with an estate planning lawyers in Orange County who are well acquainted with the laws mentioned above, that way you can circumvent incredible tax fees and maximize the value of the inheritance you pass on to your loved ones.

If you wish to learn more about these laws, contact us at McKenzie Legal & Financial today.

Thomas McKenzie Law
Estate Planning Attorney in California. Full-service law firm specializing in estate plans, wills and trusts, long-term care, and financial consulting. Thomas L. McKenzie received his Juris Doctor degree from Western State University College of Law, in Fullerton, California. While working full-time at night and attending full-time daily classes, Tom graduated law school with honors in 1993.

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