If you have been very successful from a financial standpoint, you have to be concerned about the potential impact of estate taxes. Many people contend that the death tax is not fair, because your estate is comprised of resources that you have been able to retain after paying innumerable taxes throughout your life.
Why should your death be a taxable event in and of itself?
This a good question, but whether it is fair or not, the federal estate tax is a fact of life. The good news is that there is a credit or exclusion that allows you to pass along a certain amount of property free of taxation, and it is quite high.
At the time of this writing in 2020, the federal estate tax exclusion is $11.58 million. We should point out the fact that the top rate of the tax is 40 percent, so a significant chunk of your legacy could potentially be absorbed by taxation.
Because this exclusion is allotted to each individual taxpayer, if you are married, you would have an $11.58 million exclusion, and your spouse would have the same exclusion.
The matter of “portability” in this context refers to the ability of a surviving spouse to use the exclusion that was allotted to his or her deceased spouse. Prior to 2011, the estate tax exclusion was not portable. To put it in a nutshell, when you died, your estate tax exclusion died with you. Your surviving spouse would only have one exclusion to utilize going forward.
Getting back to the matter of fairness, in most cases, both people that are in a marriage contribute to the wealth that is accumulated. If the estate is the product of the efforts of two individuals, why should the surviving spouse have just a single exclusion?
In this instance, the common sense argument won out. When a tax reform measure was enacted in 2011, the estate tax exclusion became portable between spouses. Portability has been retained since then, so the surviving spouse would have a total exclusion of $23.16 million using the figures that are in place for 2020.
Another thing to understand about the estate tax and married couples is the fact that there is an unlimited marital deduction. You can transfer any amount of money or any other type of property to your spouse free of taxation, as long as your spouse is a citizen of the United States.
If you are thinking that you can simply give gifts to your loved one while you are living to avoid the estate tax, your logic is sound, but there is roadblock.
There is a gift tax in place that is unified with the federal estate tax. The exclusion is a unified exclusion that encompasses large lifetime gifts along with the estate that be transferred to your heirs after you are gone.
State Estate and Inheritance Taxes
The majority of the states in the union do not have state-level estate taxes, but there are several that do impose their own separate death taxes. On the state level, the exclusions are usually lower than the federal exclusion. As a result, you could face exposure to a state estate tax even if you are exempt from the federal tax.
One of our locations is in Vermont, and there is an estate tax with an exclusion of $4.25 million and a 16 percent maximum rate. Our other office is in Albany, New York, and the Empire State has an estate tax as well. The max rate is the same at 16 percent, and the exclusion is $5.85 million.
An inheritance tax is a different form of taxation that is potentially applicable on transfers to each non-exempt inheritor. There is no federal inheritance tax, but there are six states with inheritances taxes. Vermont and New York are not among them.
Download Our Estate Planning Worksheet
If you would like to learn more about estate taxes and other important topics, we have developed a valuable resource that is available to you through this website. Our attorneys have produced an educational worksheet that you can use to gain a more thorough understanding of the process. It is being offered free of charge at the present time, and you can click this link to obtain access to your copy.
Attend a Free Seminar!
We are holding a series of informative seminars over the coming weeks, and you can learn a lot if you attend one of these sessions. There is no charge for admission, but we ask that you register in advance, because space is limited. To do just that, visit our seminar schedule page and follow the simple instructions.