You worked hard or invested wisely to accumulate your personal wealth over the course of your adult life. From your first savings account to the real estates that you hold as a potential future investment, the assets you acquire have value both in that they mean something to you and that they represent a financial investment.
Typically, you will have paid tax on the income that you used to acquire those assets before also paying tax on the purchase of various items that you own. For many people, it seems highly unfair that those same assets would be subject to yet another tax after they're gone.
However, that is how the federal estate tax works. Items that you have long owned and already paid taxes on during your life may be subject to additional taxation before your loved ones and heirs may access and use those assets. Careful estate planning can help you lower your potential estate tax liability.
Estate tax is where death and taxes overlap
The federal government expects that the administrator of the estate will pay taxes on the total value of the estate if it exceeds a certain threshold. Although the government has increased that threshold in recent years, it is currently only $11,400,000. For some people, real estate holdings alone can leave their estate vulnerable to estate taxes.
Thankfully, the state of Colorado does not assess an estate tax. Additionally, it may be possible for you to plan now to avoid estate tax liabilities for your heirs and family members.
Trusts and gifts reduce the taxable estate
To avoid reaching the federal threshold of $11,400,000 in value, you need to consider transferring the ownership of some of your assets prior to your death. Giving certain assets to family members can be a way to witness them enjoying their inheritance while you still live.
An early inheritance could help a child pay off student loans or purchase a property. It could also be used to fund a new business venture. By giving certain assets to family members as gifts during your life, you allow them to have the benefit of assets you intend for them without the risk of estate tax in the future.
The creation of one or more trusts can also be a way to limit estate tax issues. For example, it may be possible to hold your real estate in trust, as well as many other assets. You can also develop trusts that you fund during your life or after your death to shield some of those assets from tax liability.
The exact way that you structure things will vary greatly depending on both your family's needs and the kinds of assets you own. Consulting with an experienced Colorado estate attorney can help you determine how to minimize your tax liabilities for your estate.