Estate Taxes or “Death Tax” – Who pays and how much? It’s not just for the Wealthy
The term “Death Tax” has been floated around for some time now, with the average household aware of the fearful possibility of having a significant tax burden upon the death of a family member. This isn’t an issue solely for the ultra-wealthy to consider during estate planning.
The "Death Tax" refers to the Federal Estate Tax, which is imposed on the assets of an individual who has passed away with assets over a predetermined threshold. This term often incites a level of anxiety and confusion with a minimal understanding of the Federal Estate Tax's actual implications.
The basics of the Federal Estate Tax are when someone dies, that individual’s estate will be subject to taxes on the value of assets that they owned above the designated threshold. Realistically a majority of Estates are currently not large enough to incur a tax. Understanding which Estates will be subject to a Federal Estate Tax is crucial in implementing a comprehensive Estate Plan.
What is that threshold?
The current threshold for a Federal Estate Tax is a tax on assets over $11.58 Million. Estates with under that amount are exempt from paying a Federal Estate Tax. This threshold was set under the Tax Cuts and Jobs Act of 2017, raising the base exemption amount from $5 million to $10 million (subjected to annual inflation).
It is essential to understand that the Federal Estate Tax threshold is a moving target. The current exemption amount and rates are scheduled to end in 2025 leaving uncertainty to the future of the Federal Estate Tax. Ultimately, the issue is that when preparing an Estate Plan, it is important to include tax planning aspects in your Trust. Prepare for the situation that when you eventually do pass away and the threshold has moved drastically, leaving your Estate subject to owe an Estate Tax by implementing necessary tax planning provisions.
Year Amount Exempt from Estate Tax Highest Federal Estate Tax Rate
2003 - $1 million 49%
2004 - $1.5 million 48%
2005 - $1.5 million 47%
2006 - $2 million 46%
2007 - $2 million 46%
2008 - $2 million 45%
2009 - $3.5 million 45%
2010 - UNLIMITED N/A
2011 - $5 million 35%
2012 - $5 million 35%
2013 - $5.25 million 40%
2014 - $5.34 million 40%
2015 - $5.43 million 40%
2016 - $5.45 million 40%
2017 - $5.49 million 40%
2018 - $11.2 million 37%
2019 - $11.4 million 37%
2020 - $11.58 million 40%
2021 - $11.70 million 40%
Simply tracking how the threshold amount has changed over recent years gives an understanding of the fluidity in the treatment of the Federal Estate Tax. It is impossible to predict where the threshold will be in the future when you pass away. Considering a new administration has taken over the white house there is a degree of uncertainty for the future of the Federal Estate Tax. The administration has a different approach to the Estate Tax. An important consideration is that the Federal Government has spent several trillion dollars already for COVID-19 related stimulus packages with the potential for more aid packages in the future. The government will have to recoup this expenditure somehow, and often they look to taxes as the primary avenue for increased revenue. The individual tax rates and the Federal Estate Tax are probably places that the government will look for raised funds.
Luckily for Californians, all they need to consider currently is the Federal Estate Tax, as California does not impose a tax on the state level. However, some states impose an Estate Tax on a State level. To date, roughly a dozen states have a state-level estate tax, and another half dozen collect an inheritance tax on the individual receiving the inheritance. The State of Maryland collects both an estate and inheritance tax. Depending on where you reside, it is crucial to understand both the Federal Estate Tax and if the state you are in collects on a state level, which historically has been much lower than the Federal threshold detailed above.
What is Taxed?
Just as necessary as comprehending the tax threshold, understanding what of your Estate is considered taxable. It is a misguided belief that most people have that their assets do not amount to enough for consideration of an Estate Tax burden. This belief may be valid under today’s thresholds; however, as recently as 2008, the exemption was $2 Million. Should the federal government return to this lower threshold, it is much easier to reach this valuation than most would believe. The Estate Tax is levied against the entire Estate, which consists of all your Life Insurance, Annuities, IRAs, Pensions, Real Property, Personal Properties, Investment Accounts. These assets can add up quickly, especially in California, where Real Property prices can quickly exceed $1 Million on their own for a modest household. Add in a life insurance policy for $1 Million, and right there; you’ve reached a $2 Million threshold.
Planning accordingly and being prepared for modifications to your estate plan as the federal government changes to the Estate Tax is a necessary part of maintaining your planning. Working closely with an Estate Planning Attorney will facilitate modifications to your Estate Plan with minimal effort or costs so long as proper planning was considered early in the process.
About The Law Office of Natalie A. Miller
Natalie Miller is licensed to practice law in California. Information presented on US laws. This article is legal information and should not be seen as legal advice. The opinions contained herein are those of Natalie Miller and not of any other organization. The information contained herein does not create an attorney-client relationship nor a requirement that Natalie Miller take you on as a client.
