Tax Law

Estate and Inheritance Taxes

Key Takeaways

  • The estate and inheritance taxes are also called “death taxes.” The terms are often used interchangeably, but they differ in who pays the tax.
  • The estate tax is a tax your estate pays after you die. The inheritance tax is a tax you pay when you inherit money after someone else dies.
  • You can lower your death taxes by using strategies that reduce the size of your estate.

One challenge of estate planning for Americans is death taxes. Although only a small portion of taxpayers must pay them, you should still understand them.

Estate law varies from state to state. In some simple cases, low-cost do-it-yourself (D.I.Y.) estate planning is possible. But things can get complicated depending on your situation, especially if estate taxes are involved. It may be a good idea to consult with a tax planning lawyer in your area who understands estate taxes for advice about your situation.

What Are the Estate and Inheritance Taxes?

The estate and inheritance taxes are sometimes called “death taxes” because they aren’t levied until someone dies. While we often use the term interchangeably, they are different. The main difference is who pays them.

The estate tax is a tax your estate must pay after you die. It’s based on the value of your estate at the time of your death. The federal government and some states have one. Don’t confuse the estate tax with real estate taxes. Those are taxes based on the valuation of real property, like your house.

The federal estate tax rate varies. Its top rate is 40%. The estate tax exemption often lowers the effective estate tax rate. Twelve states and the District of Columbia have a state estate tax. Hawaii and Washington have the highest top tax rate of 20%. Other states have a top rate of 16%. Connecticut and Vermont are the only states with a flat estate tax rate.

The inheritance tax is a tax that a beneficiary must pay on the value of their inheritance. There is no federal inheritance tax; however, Nebraska, Iowa, Pennsylvania, Kentucky, and New Jersey have one. State inheritance tax rates also vary.

Maryland is the only state with both taxes.

What Is the Estate Tax Exemption?

All estates are subject to the estate tax at the federal level. It doesn’t matter if you have a will, a trust, or nothing, which is called dying intestate. But you only have to pay tax on the value of your estate over the federal estate tax exemption amount. The federal estate tax exemption is the dollar amount below which your estate doesn’t pay the tax. It’s adjusted yearly for inflation.

The 2024 exemption is $13.61 million for individuals and $27.22 million for married couples. Today, it’s rare for an estate to pay taxes due to the high exemption amount. The current exemption expires on January 1, 2026. If Congress doesn’t renew the current tax law, the exemption amount will revert to $5,490,000 per person, indexed for inflation.

States that have an estate tax also have a state exemption amount. The state exemption varies.

Is There a Way to Lower Estate Taxes?

Lowering your estate’s value can reduce or eliminate your estate tax liability. One way to do that is to give away part of your estate before you die.

If you follow this gifting strategy, you must know about the federal gift tax. In 2024, you can give an individual up to $18,000 without paying a tax. Anything over that amount is subject to the gift tax. Depending on the size of your estate, gifting may be a long-term strategy to lower its value.

You can also use more complex planning strategies to lower your estate tax burden. These involve the use of irrevocable trusts. An irrevocable trust removes assets from your estate. Although the asset is no longer yours, you can keep using it.

Examples of irrevocable trusts include the following:

  • Intentionally defective grantor trust (IDGT)
  • Irrevocable life insurance trust (ILIT)
  • Grantor retained annuity trust (GRAT)

Be aware that these irrevocable trusts are advanced estate planning techniques. You should talk to an experienced estate planning attorney to ensure your trust has no unintended consequences. Also, remember that these trusts are designed to lower the value of your taxable estate. There have been proposals in Congress to reduce or eliminate their use entirely.

Find a Qualified Estate Tax Lawyer

The federal government and Internal Revenue Service (IRS) don’t make it easy for a deceased person’s loved ones. Tax law matters can become complex and stressful for them. A qualified tax planning lawyer can help. They can explain the tax rules and file a federal estate tax return. Take the first step now and contact an attorney to discuss your specific legal situation and your goals for maximizing what you can pass on to your loved ones.

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