When considering estate planning, it’s critical to consider the tax implications of the decisions that you’re making. Building awareness about how taxes could affect you and your heirs is crucial in ensuring you’re making solid financial decisions that maximize the value of your estate.
Mississippi is a tax-friendly state for many people. In the big picture, it is a great state to live in if you are a retiree and/or planning to protect the financial future of your loved ones through your estate. However, it’s essential to understand what federal taxes may apply and what changes could be made to your financial and estate plans to further protect your assets from being taxed.
Estate Tax
While the state of Mississippi doesn’t levy estate taxes, The IRS has an established estate tax threshold that increases annually. This tax, sometimes called the death tax, is paid on the deceased person’s assets. Depending on the estate’s value, this death tax can run between 18% to 40%. It’s important to note that estate tax is based on an asset’s current fair market value.
When you die, your assets get transferred to the estate and could be subject to estate tax. This would include assets that include cash, securities, and other property.
The federal estate taxes have an exemption limit that allows some lower-value estates from paying estate tax. This limit is $12.06 million in 2022 and $ 12.92 million in 2023. Any amount below the established yearly limit will not be subject to taxes.
This further benefits married couples as a spouse’s inherited assets will generally be exempt from federal estate taxes. The IRS has an unlimited marital deduction for assets going to a spouse. Once other designated heirs and beneficiaries are included in the estate plan, they may be affected.
Inheritance Tax
Inheritance tax is applied to assets that have already been distributed to heirs, who are then responsible for paying the inheritance tax on the assets they inherit.
As with estate tax, the state of Mississippi has no inheritance tax. However, when beneficiaries receive an inheritance through an out-of-state will or trust, the tax may still apply if it is left by someone who lives in a state with an inheritance tax.
Gift Tax Law
For those making above the estate tax threshold, gifting their money and assets is a strategy often used to lower the value of their total estate. However, in most cases, limits are placed on the amount you can gift annually before it is taxed with a federal gift tax. In 2022 it’s $16,000, and the limit will be $17,000 in 2023. This is doubled when gifted from 2 spouses. This long-term strategy may be combined with others to avoid federal taxes.
Gifting Assets to Children and Grandchildren
The IRS allows you to give annual gifts to children and grandchildren and avoid the gift tax as long as it doesn’t exceed the federal gift tax limit. If you do this over several years without exceeding the limit, you can significantly reduce your potential tax liability at death.
If you are gifting to minors, discuss the gifting strategies available with a tax expert. They will guide you on how to protect minor children, and potentially avoid tax burdens through the Uniform Transfers to Minors Act and Uniform Gifts to Minors Act.
These two acts allow you to transfer assets, including cash, property, or other valuables, to the minor trust, which the donor or another appointed custodian manages. Benefactors may decide to exceed the federal gifting limit as the tax rate is for the minor receiving the gift, not the donor, and they are only taxed on amounts that exceed the federal limit.
Skipping a Generation with Gifting
The federal government has safeguards in place for themselves for gifts that skip a generation, meaning they go directly to the grandchildren and not their children. Of course, there are many reasons why a benefactor might choose to do this, but the gift may be subject to a GST or Generation-Skipping Tax.
For gifts that exceed the annual gift exclusion rate, and skip a generation, the GST will likely be applied to avoid intentionally skipping a generation to avoid paying federal estate taxes later once the owner dies.
While creating or updating your estate plan, it’s essential to recognize that tax laws are often subject to change depending on the political climate. It’s necessary to be aware of these issues and be prepared to make modifications accordingly by working with an estate tax expert.
Other Strategies to Reduce Your Tax Burden
Every situation is unique, and it’s important to collaborate with an estate tax expert to help guide you through options that make sense for your circumstances and goals. Other opportunities to look into include the following:
- Family limited liability partnerships to protect business interests
- Charitable trusts to benefit important causes, receive tax deductions on your donation, and avoid paying taxes on the donation
- Various Irrevocable Trusts to help shelter your wealth from taxes.
Get Expert Legal and Tax Advice to Maximize Your Estate
Tax laws are subject to change depending on the political climate. Depending on the current tax laws, you may want or need to adjust your tax planning and revisit your plan as your circumstances, or federal and state laws, change. To speak with a trusted Mississippi legal team to create and protect your estate plan, reach out to Lancaster Law Firm today.