There are many financial details that people may need to consider when planning their estates. For example, those who have beneficiaries with special needs may need to take steps to help them maintain certain state benefits. A lump-sum inheritance could make an individual ineligible for benefits for some time. People may also need to consider whether an inheritance could be vulnerable to misuse or division if a beneficiary divorces later.
Testators establishing estate plans also often go to great lengths to try to keep things as fair and even as possible when distributing assets among their beneficiaries. They may also need to consider financial matters that affect what their beneficiaries actually receive from the estate.
For some testators, debts ranging from credit card balances to student loans could diminish what their beneficiaries inherit. For others, estate taxes might be a concern. When are estate taxes an important consideration for those establishing an estate plan?
Large estates are vulnerable to taxes
The good news for those living in Colorado is that there is no state-level estate tax. Regardless of how much property an individual owns, the state does not intercept any of their property before it passes to their beneficiaries.
However, any estate probated in Colorado could be subject to federal estate taxes. The total value of the estate determines if taxes apply and what tax rate the estate must pay. For those who die in 2024, the estate tax exemption threshold is $13.61 million. For the estates of those who die in 2025, that threshold is $13.99 million.
The tax rate is progressive. The more the estate exceeds the threshold for exemption, the higher the tax rate that applies. Some estates are subject to an 18% federal estate tax rate. The highest possible rate is 40%. A variety of planning tactics can diminish estate tax risk for testators. Trusts, gifts and ownership adjustments made before an individual passes can all diminish estate tax liability.
Planning for estate taxes can be as important as planning for the overall distribution of estate property. Testators hoping to maximize their legacies may need to occasionally revisit their estate plans. Comparing changing exemption levels and the current fair market value of their assets can help them determine if estate tax planning is necessary in their situation.