Delaware Estate Tax: Top Strategies to Mitigate

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Paul Sundin, CPA

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While we don’t have too many clients in Delaware, we still get questions regarding estate tax. Those people are aware of Delaware income tax rates, but estate tax is another issue. High income households must understand how it works.

In this article, we are going to examine certain Delaware taxes such as estate tax, gift tax, and inheritance tax. It can be a challenging area so let’s get started.

Delaware estate tax

This is a big concern for taxpayers with large estates. But the good news is that Delaware does not assess an estate tax.

But just because Delaware does not have an estate tax doesn’t mean that you’re not subject to it at the federal level. While the exemption level is high enough so it will not impact most people, it still be it can be a concern for you.

Federal estate tax

The federal estate tax exemption for 2021 is $11.7 million. It’s expected that less than 1% of American households will be impacted by this.

But there is discussions revolving around reducing the exemption amount and also increasing the tax rate from 40% to 45%.

So how does the federal estate tax work? Congress says it’s pretty easy. But most people will find it very challenging. In fact, many CPAs have a tough time with it. This isn’t because they don’t understand the calculation, but they just don’t have to apply it in the real world too often. 

Once a person dies, the executor of the estate will uncover all assets. This includes stocks, bonds, mutual funds and other assets, such as real estate and business interests. 

While it can be challenging to examine all the assets, the biggest challenge is usually determining a fair market value for each asset class. This is straightforward for stocks, bonds, and mutual funds.  But it can be much more subjective for real estate and business interests.

Once final values have been determined, the estate can deduct mortgages and other debt obligations. In addition, the estate can deduct legal, CPA, and other administrative fees.

Delaware inheritance tax and gift tax

Fortunately, Delaware residents are not levied an inheritance tax or a gift tax. This is great news.

In fact, most states without an estate tax have no gift tax. Only seven states assess an inheritance tax.

When is the correct time to file an estate tax return? The federal estate tax form must be filed within nine months of the date of death. If the decedent passed away before the deadline, the Successor Trustee may file an extension for six months without incurring any penalties or interest.

An extension can be useful if the decedent died in the middle of the calendar year. This is particularly important when the estate contains assets worth over $3 million.

Whether a trust needs to file a federal estate tax return depends on the value of its property. The total value of the trust’s assets includes any property that passed to the trust by virtue of the Grantor’s Will.

In most cases, a trust needs to file a Form 1041 as an income tax return. The grantor’s living trust will need to review all bills to make sure they are paid and not merely a portion of the total value.

If the estate elects to use a TIN for the QRT, the personal representative must get a TIN for the related estate. This is not required if the QRT elects to use its own TIN. However, the personal representative must include the QRT’s TIN on Form W-9.

The Wife’s elective share must receive the ratable portion of the IRD. The Wife’s elective share cannot receive the income earned by the children.

Trust tax planning

Trusts provide the flexibility to distribute income among your beneficiaries and children over the age of 18. These arrangements are often popular, as they allow you to split your income with family members who pay lower taxes.

In addition, trusts can provide funds for down-payments on homes, personal needs, and education expenses for children. If they have no other sources of income, beneficiaries can receive up to $35,000 in dividends each year without incurring significant personal income taxes.

A professional will guide you through the setup process and explain your responsibilities as a trustee. They will explain the different tax considerations and requirements for these documents. As trustees, they must have a combination of financial, business, and interpersonal skills.

A trustee must also consider possible conflicts of interest between beneficiaries and trustees. If family members are involved in the process, it is best to appoint a professional trustee. In some cases, this person will need to be educated about the role of a trustee and how they can benefit the beneficiaries.

In addition to estate planning, trust tax planning is important for avoiding CRA taxes upon death. In addition to estate planning, trusts are highly efficient tax tools, but they’re also often misunderstood. Many people think of them as complex tax mitigation vehicles, when, in reality, they are highly beneficial.

A qualified tax planner can assist you in determining which type of trust is best for your situation. The following are some general tax considerations for trusts.

Delaware tax situation 

Delaware remains a moderately tax friendly state. While they do have real estate taxes and an income tax, at least they have no estate, gift, or inheritance tax. This can make the state favorable for wealthy individuals or high-end taxpayers planning a move to the state.

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