The Estate Tax: What You Need to Know

For the vast majority of people in the United States, the estate tax seems like something that should be of little concern. After all, it really only applies to a small percentage of Americans, estimated to consist of less than one percent of the overall population – roughly one out of 495 decedents’ estates in 2015. Despite that common claim, however, the fact that most heirs will never pay an estate tax on their inheritances provides no comfort for those who do.

The fact is that if you are creating your own estate plan, chances are that you would prefer that none of your wealth be taxed when you die. To minimize that possibility, you need to know some basic facts about the estate tax and how it works.

What is the Estate Tax?

The IRS defines the estate tax as a “tax on your right to transfer property at your death.” To determine whether your property is subject to this form of taxation, an accounting must be made of the true value of all of your property and interests as of the day that you die. That value is based solely on the actual market value of the property, rather than your purchase price or any previous value attached to them. The total value of all of your assets is then referred to as your gross estate. This can include the value of a wide variety of different asset types:

  • Cash in your bank accounts
  • Stocks and bonds
  • Life insurance policies
  • Annuities
  • Trusts
  • Real Estate
  • Your business and investments
  • Almost anything else of value that you might possess

Calculating Tax Owed

From that gross estate value, you are allowed to deduct various amounts to determine your taxable estate. For example, if you have mortgage or other debt, any properties that automatically transfer to charities or your spouse, qualifying business interests, or estate administration costs, those items can all be considered deductions to lower the overall value of the estate and reach a net estate value. The government then adds taxable gift values to that net amount to determine the taxable value of your estate. It then reduces that tax using what it calls a “unified credit.”

If any of that is confusing to you, you’re not alone. Like most of the tax code, the estate tax can be difficult for the average American to decipher, and that alone can cause a great deal of frustration for beneficiaries who are left wondering whether their departed loved one’s estate is subject to this tax.

Who actually Has to Pay?

Currently, the federal exemption for the estate tax stands at $5.4 million for individuals, and twice that for married couples. That means that no estate with a total gross value less than that amount has to even file an estate tax return – much less be subject to the tax. That is, at the federal level. However, the desire to tax wealth is not limited to elected officials and bureaucrats in the nation’s capital; many states have also gotten into the act, as they try to grab their piece of the pie as well.

State Estate Taxes

There is much to know about the state estate tax system if you are to properly prepare for your estate planning. While most states no longer have their own estate taxes, some still do – and others have their own unique way of taxing estates, using different variations of the federal system or relying on inheritance taxes that directly tax the beneficiaries. These details are important, since anyone who lives in a lower-exemption state may discover that his estate may have escaped the federal tax only to fall prey to the clutches of the state tax system.

A great example of this disparity in the state and federal approach can be seen in New Jersey. There, estates only receive an exemption on values up to $675 – exposing many more estates to the New Jersey estate tax. There are other states that also have exemptions as low as one-fifth that of the federal tax system. The actual rates assessed by these states can vary as well, though few are as high as the 20% assessment levied by the State of Washington.

The bottom line is simple: learn about the law in your state and plan accordingly if you want to minimize your estate’s tax liability. If you plan on retiring in another state, chances are that you’ll take most of your assets with you. If that’s the case, you will need to plan your estate with that state’s laws in mind. In spite of the fact that estate tax advocates consistently argue that the federal tax only affects the upper echelons of America’s wealthiest estates, there is still plenty of tax burden to be found at the state level.

Get Professional Assistance

The good news is that there are ways to deal with these tax concerns. Various estate planning strategies can work to ensure that your estate’s value is reduced before you die to minimize that tax burden. However, these strategies often involve complex legal maneuvers that many laypeople struggle to understand, and any mistakes in gifting or other asset management could result in the government counting those assets as part of your estate anyway. The best way to avoid that possibility is to consult with an experienced law firm that can provide the guidance you need to properly manage your estate.

We have the competence and expertise you need to take care of these complex legal matters long before they become a tax liability concern. Our legal experts can work with you to design an estate plan that minimizes tax liability, to ensure that your assets are there for the benefit of your beneficiaries, rather than providing additional tax revenue for federal bureaucrats to spend. We’ll review your estate assets and walk you through all your available options so that you can choose the planning strategies that are right for your unique circumstances. Give us a call today so that you can start protecting your hard-earned wealth from being taxed after you die.

Subscribe to our newsletter

Act now.

Provide protection for yourself and the people you care for.

Take action before it becomes a race against time.

Rely on the Barbara M. Pizzolato, P.A. skilled estate team to shield your work and guide your loved ones.

We specialize in estate planning, incapacity planning, business planning, trust administration, and probate.

Take your first step by contacting us or attending a free estate planning event today.

Time waits for no one.

Skip to content