Delaware is known as a tax-friendly state for businesses, which is why so many companies are incorporated here, including some of the world’s largest corporations. Besides being a tax haven for businesses, Delaware is also an excellent place to live for people with significant wealth when it comes to estate planning.
That is because Delaware does not impose any of the taxes often associated with inheritance. Specifically, the estate tax, inheritance tax and gift tax.
This is a tax imposed on an individual’s estate after they pass away. Delaware had an estate tax until Jan. 1, 2018, so estates of people who died before that date are still subject to the state estate tax. The federal estate tax is still in effect. For 2020, the federal tax is imposed on an estate’s wealth above $11.58 million; in Delaware, the tax that is being phased out applies on wealth above $5.49 million.
The difference between this tax and the estate tax is that the inheritance tax is imposed on heirs when they inherit from the estate. Delaware does not have an inheritance tax, but some other states do. If you live in one of those states and one of your heirs lives in Delaware, they may still have to pay an inheritance tax to your state of residence.
Many people choose to make gifts to their future heirs and trust beneficiaries while they are still alive. This can help you avoid estate and inheritance taxes. It also allows you to see your heirs enjoy part of their inheritance during your lifetime.
Delaware does not have a gift tax, but the federal tax code does. As far as the state is concerned, you can make gifts of any value without a tax penalty, but the federal level taxes gifts of more than $15,000 per calendar year.
Considering taxes when estate planning
When setting up or amending your estate plan, taxes should be a big part of the conversation you have with your lawyer. An experienced estate planning attorney will be able to explain the possible tax implications of your plan, and help you create a custom plan that minimizes the amount of taxes your estate and heirs will have to pay.