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Colorado Estate Tax Explained 2024
Last Updated on March 13, 2024
The estate tax is a tax imposed when transferring a deceased person’s estate to heirs and affects the estate’s beneficiaries. The tax rate is based on the size of the estate and where the estate is based. So how does the estate tax work in Colorado, and what are its tax rates?
In this article, we’ll dig the basics of the estate tax and walk through different tactical approaches you can take to maximize your hard-earned gains you pass onto future generations:
- Use trusts:
- Pass money to next generations free of estate tax and without using your lifetime gift exemption with a Grantor Retained Annuity Trust (GRAT) or combine GRATs with direct indexing to maximize the GRAT’s volatility and increase returns by even 98% or more.
- Place assets into a Spousal Lifetime Access Trusts (SLAT): Your spouse can access the assets during your lifetime, and any appreciation will pass to your kids and future beneficiaries estate tax free.
- Preserve your wealth, reduce or avoid estate taxes, and ensure that assets are managed and distributed according to their wishes over multiple generations with a Dynasty Trust.
- Use CLATs to pass on assets to future generations and charitable causes while avoiding estate taxes and not using your limited gift exemption.
- Utilize gifting before your death: you can take advantage of your annual and lifetime gift exemptions to reduce your estate’s taxable value
- Invest in life insurance: it can be used to pay estate taxes, is generally exempt from income tax, and can be structured to avoid the estate tax by being put in an Irrevocable Life Insurance Trust (ILIT) or setting up Private Placement Life Insurance (PPLI) to avoid income and estate taxes.
But first, let’s start with the basics of what the estate tax is and what’s the difference between state and federal estate taxes.
What Is The Estate Tax?
Before diving into the Colorado estate tax and its workings, let’s get into the estate tax basics.
The estate tax is a tax on the transfer of assets between generations, i.e., from parents to their heirs. It is generally imposed on the estate’s total value and any gifts made before the person passes away above a pre-determined exempt amount that varies by state. Starting in 2024, individuals can transfer up to $13.61 million, during life or at death, without triggering the federal estate-tax bill, up from the 2023 exemption amount of $12.92 million.
However, each state has its own state-specific estate tax rules. Some states may not impose an estate tax, while others, have a high tax rate. Moreover, the tax rate varies depending on the value of the gifted assets; typically, the more assets you pass on, the higher the tax rate you will lose to the estate tax.
These taxes are intended to reduce the wealth concentrated in a single estate by increasing the taxes on inherited wealth. Still, they can be minimized or completely avoided through estate planning. But how?
Estate Planning Overview
Estate-tax planning comes into play when you want to pass assets to the next generation. With estate-tax planning, you can arrange your affairs to reduce the amount of federal and state estate taxes you and your heirs or recipients will face and maximize how much you pass on to the next generation.
Importantly, estate tax planning can significantly impact how much you pass on to heirs because of how high federal and state estate taxes are.
Need some help to understand the most convenient tax planning structure to reduce your estate taxes? Our team of tax-planning experts can help!
Federal Estate Tax
The Federal Estate Tax is a tax on assets transferred from a person who passed away to their heirs. It is paid by the dead person’s estate and is due nine months after death. Federal estate taxes range from 18% to 40%. This means that if you are giving away $1 million, over and above the federal estate tax exemption, you would owe $400,000 in federal estate taxes and only leave $600,000 behind for your beneficiaries. And that’s even before accounting for any state estate tax liability!
Federal Estate Tax Rates
| Taxable Estate Above $13.61 Million | Base Taxes Paid | Marginal Rate |
|---|---|---|
| $13,610,000 – $13,620,000 | $0 | 18% |
| $13,620,000 – $13,630,000 | $1,800 | 20% |
| $13,630,000 – $13,650,000 | $3,800 | 22% |
| $13,650,000 – $13,670,000 | $8,200 | 24% |
| $13,670,000 – $13,690,000 | $13,000 | 26% |
| $13,690,000 – $13,710,000 | $18,200 | 28% |
| $13,710,000 – $13,760,000 | $23,800 | 30% |
| $13,760,000 – $13,860,000 | $38,800 | 32% |
| $13,860,000 – $14,110,000 | $70,800 | 34% |
| $14,110,000 – $14,360,000 | $155,800 | 37% |
| $14,360,000 – $14,610,000 | $248,300 | 39% |
| Over $14,610,000 | $345,800 | 40% |
What Is the federal estate tax exemption?
Each individual has a lifetime estate tax exemption — a gift tax exemption or the basic exclusion amount. This exemption is the value of assets you can give away, throughout your life and after your death, without being subject to the federal estate taxes described previously.
For 2024, this exemption is $13.61 million/per person. Because the exemption is per person, married couples can give away double that amount. In addition, as of 2023, you have an annual gift exclusion which allows you to give up to $17,000 per person/year that doesn’t count towards the gift tax exemption.
However, it’s essential to know the federal estate tax exemption level is scheduled to reduce by about 50% to $6.6 million when the Tax Cuts and Jobs Act sunsets in 2026, which is why it’s essential to get started with estate planning sooner rather than later.
So, how do all of these apply in the state of Colorado?
Colorado Estate Tax
Currently, the estate tax in Colorado in 2024 is 0%. As a result, when passing assets on, you won’t owe Colorado estate taxes when passing assets on. Zero-estate taxes make Colorado attractive for wealthy individuals and those with large estates, as they can pass on their estates to their heirs without worrying about the government taking a significant portion of their wealth. However, if the estate’s value exceeds the federal tax exemption amount, then the estate is responsible for paying the remaining tax.
Example of Estate Tax in Colorado
Let’s say your total taxable estate is $18 million. Critically you won’t owe any estate taxes in Colorado since there aren’t any Colorado estate taxes but you will owe Federal estate taxes as the federal gift exemption is $13.61 million. Just from the Federal estate tax you/your estate would owe ~$1,701,800.
Or in other words, your heirs would get $16,298,200 after the estate tax if you didn’t do any estate planning work. Fortunately, with some estate planning, you could avoid those Federal estate taxes entirely.
Does Colorado have a Gift Tax?
Colorado does not have a gift tax exemption limit since there’s no estate tax for this state. To clarify this, estate and gift taxes are usually viewed identically because they are subject to the same rate and share the lifetime exemption amount. However, the one key difference is that the estate tax applies to transfers of the decedent’s property at death, whereas the gift tax applies to transfers made during his or her life. As a result gifts of any size are allowed to be given from one individual to another without any Colorado gift taxes.
Tax planning ideas to reduce your estate taxes in Colorado
While residents won’t face a Colorado estate tax, they may still face the Federal estate tax. Fortunately, there are solutions that can help minimize or altogether avoid the federal estate tax.
- Use trusts: Establishing a trust can help reduce an estate’s taxable value and the estate taxes due. Three commonly used options are:
- Grantor Retained Annuity Trust (GRAT): 99 of the 100 wealthiest Americans use a trust structure to pass assets on to future generations. With a GRAT, you can place assets into the trust, any appreciation above a set percentage will pass to your beneficiary’s estate tax-free, and you won’t use up any of your lifetime gift exemption. As a result, you can substantially reduce the size of your taxable estate while passing on assets to your heirs. To get even better returns, you can use Valur’s Direct-Indexed GRATs, where instead of buying a single index fund and placing it in a GRAT, you’d follow a direct index strategy and open up separate GRATs that would own each individual stock in the index (an important comment here: the cost of +500 Valur GRATs is comparable to the cost of 1 or 2 GRATs from a traditional service provider!). By doing so, you can take advantage of several features of GRATs to yield far greater returns — 98% higher over the last 20 years. In fact, as a result of the basic rules of GRATs, it’s impossible for the combination of direct indexed GRATs to perform worse than a single GRAT that owns the same stocks via an index fund. Sounds too good to be true? Check out our direct Indexing GRATs case study or set up a call to learn more.
- Spousal Lifetime Access Trusts (SLAT): With a SLAT, you can place assets into the trust, your spouse (and, in practice, you) can access the assets during your lifetime, and any appreciation will pass to your spouse free of the estate tax. Your children and other descendants can also be named as beneficiaries. Often, the trust is structured so that the children only become primary beneficiaries after your spouse’s death. Schedule a call with our professionals to learn more here.
- Dynasty Trusts: Designed to help individuals and families preserve their wealth, reduce or avoid estate taxes, and ensure that assets are managed and distributed according to their wishes over multiple generations. Learn more about Dynasty trusts here or schedule a call with us here.
- Charitable Lead Annuity Trusts (CLATs): CLATs are irrevocable trusts designed to reduce a beneficiary’s potential tax liability. They are best suited for those looking to mitigate a major tax exposure AFTER income is received,.The CLAT strategy is relatively simple: the grantor places money into the trust, receives an up-front tax deduction, makes a donation to charity every year of the trust’s term, and then the donor or another designated beneficiary receives the remainder of the assets after the final charitable contribution.
- Utilize gifting: By gifting assets before death, you can take advantage of your annual and lifetime gift exemptions to reduce your estate’s taxable value and allow future appreciation on your investments to take place outside of your estate and free of the estate tax.
- Use marital deductions: Married couples can use the unlimited marital deduction to transfer assets to a surviving spouse without incurring any estate taxes. The marital deduction is a tax provision that allows an individual to transfer an unlimited amount of assets to a surviving spouse without paying any federal gift or estate taxes. This means that the surviving spouse will not have to pay taxes on the assets they receive. The deduction also applies to property jointly owned by the couple, such as a home. When one spouse dies, the surviving spouse can keep the property without paying taxes. The marital deduction is essential for married couples to reduce the estate taxes they will have to pay.
- Invest in life insurance: Life insurance can be used to pay estate taxes, is generally exempt from income tax, and can be structured to avoid the estate tax by being put in an Irrevocable Life Insurance Trust (ILIT) or using Private Placement Life Insurence (PPLI).
Conclusion
The lack of estate tax in Colorado is a positive for those in the state looking to pass on their wealth to their loved ones. Without a state estate tax, only Colorado residents planning to pass on more than $13,61 million over their lives will still need to deal with Federal estate taxes without proper estate planning.
Read more about other U.S. states and their estate taxes, use our Guided Planner tool to find helpful solutions, or schedule a time to talk with our expert team.
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