Whenever there is a financial transaction, the government steps in to impose taxes. Passing your estate on to your heirs is no exception. They can tax that estate at the federal level.
That said, there are limits. For instance, in 2020, the bottom threshold for the federal estate tax is about $11.58 million. This is calculated at the time that they pass away, so it could have changed since they made their estate plan. For instance, someone who spent the last three years of their life in a nursing home, after writing a will, may spend enough on that care that they drop below the lower limit.
For those who are going to exceed that limit, there are often different ways to plan for it. Some parents choose to give monetary gifts to their heirs while they’re still alive. This helps to shrink the value of the estate so that they don’t leave as much at the end.
Others opt to put money into trusts. These trusts are then excluded from the estate because they’re no longer controlled by the person who created them. However, the trust still controls how the money is distributed, so it could delay the actual passing of the money until the heir is older.
These are just two examples, but they help to show how important estate planning can be. You want to think about the big picture and how you can leave as much as possible to your heirs. Often, the best way to do this is to look into all of your options well in advance.