As one navigates the complexities of financial planning, estate tax concerns often take center stage. While most are aware of the basics, many are left wondering: does estate planning really help reduce estate tax? The answer is multifaceted and extends beyond mere inheritance tax.
The Inheritance Tax Exemption
A critical starting point is understanding the inheritance tax exemption. This exemption sets a threshold on how much of an estate can be passed on to heirs tax-free.
Current Exemption Rates
As it stands, the inheritance tax exemption sits at a staggering $12.94 million per individual. This means that a vast majority of estates fall beneath this threshold, and thus, their beneficiaries won’t be liable for inheritance tax on their received assets. However, this exemption shouldn’t lead one to believe they’re in the clear from all estate-related taxes.
Beyond Inheritance Tax: Other Tax Pitfalls to Consider
Despite the high threshold of inheritance tax exemption, there are other avenues where beneficiaries can inadvertently incur significant tax penalties.
The Peril of Mismanaging Retirement Accounts
A poignant example revolves around Individual Retirement Accounts (IRAs). One might inherit an IRA and consider moving its funds to a new investment account. However, this seemingly innocuous action can trigger hefty tax implications if not done correctly.