How To Deal With Estate Tax In Colorado

Estate Planning And Taxes In Colorado

When considering estate planning and taxes in Colorado, it's vital to understand how these elements interact and how setting up your estate can help your beneficiaries.

• Federal Estate Taxes

As of now, each person has a federal estate tax exemption of almost $13.61 million. This means that any estate, whether it's owned by a husband, wife, or both, up to this amount is not subject to federal estate taxes. However, for estates worth more than the exemption amount, federal estate taxes ranging from 18% to 40% apply. Colorado does not levy its own estate taxes.

• Inheritance Taxes

Inheritance taxes differ from estate taxes as they are paid by the person inheriting the asset, typically money. However, it's important to note that Colorado does not have inheritance taxes. If the beneficiary lives in a state that imposes an inheritance tax, they might be liable for it.

• Annual Gift Exemption

The federal tax code allows an annual gift exemption of $18,000 per recipient, separate from the lifetime exemption. This means if you have four children, you can gift each child $18,000 annually without these gifts counting against your lifetime estate and gift tax exemption. This applies to any recipient, not just children. For example, a husband and wife can each give $18,000 annually to a child for a total of $36,000 without incurring any tax or paperwork.

• Lifetime Gifts and Appreciating Assets

If your estate is large and contains appreciating assets, you might consider making gifts during your lifetime. These gifts will count against your lifetime estate and gift tax exemption. This strategy allows the appreciating assets to be removed from your estate and potentially minimizes future estate taxes.

• Step-Up in Basis

There's a crucial tax concept known as the "step-up in basis" that can affect your estate planning, particularly for capital gains tax. If you gift an appreciating asset like your home to your child during your lifetime, it could have a significant tax implication for them. This gift counts against your lifetime estate and gift tax exemption, and when your child eventually sells the property, they would pay capital gains tax based on the property's value at the time of the gift. However, if the transfer of the property is delayed until after death, the child receives a "step-up in basis", meaning their cost basis is the home's value at the time of your death, potentially reducing their capital gains tax.

• Estate Distribution

Some families may traditionally leave the entire estate to the oldest child, typically a son, with the expectation that the estate will be divided among siblings. However, if this expectation is not met, it can lead to animosity among siblings. Careful planning and clear communication can help avoid this issue.

• Life Insurance Trust

For sizable estates likely to be taxable (over $13.61 million), establishing a life insurance trust can be beneficial. The trust provides cash from the life insurance proceeds to pay the estate taxes, preserving the estate's assets. Life insurance proceeds are generally not taxable, except when they are payable to the estate. For more information on Dealing With Estate Tax In Colorado, an initial consultation is your next best step.