What are “death taxes” (estate and inheritance taxes)?
– “Death taxes” is a colloquial term for taxes that apply when wealth moves after someone dies. It generally refers to two distinct levies:
– Estate tax: a tax paid by the deceased person’s estate before assets are distributed to heirs.
– Inheritance tax: a tax paid by the person who receives an inherited asset (the beneficiary).
How they work — key points
– Federal estate tax is calculated on the value of the decedent’s taxable estate at death (after permitted deductions).
– The federal estate-tax system uses a large exclusion amount: only the portion of the estate above that exclusion is potentially taxable.
– Federal estate-tax rates are progressive; the federal schedule ranges from 18% up to 40% on taxable amounts.
– Some states impose their own estate tax; a handful impose an inheritance tax. The federal government does not impose an inheritance tax.
– The Tax Cuts and Jobs Act (TCJA) raised the federal exclusion for deaths after 2017 but its higher exclusion is scheduled to roll back after 2025 unless Congress acts.
2023–2024 federal exclusion amounts (examples)
– 2023 federal basic exclusion: $12.92 million per individual.
– 2024 federal basic exclusion: $13.61 million per individual.
– If the decedent’s taxable estate is below the applicable exclusion in the year of death, no federal estate tax is due.
– Note: the exclusion is reduced by any past taxable gifts the decedent made during life (unified gift-and-estate system).
Unified tax credit and gift/estate interaction
– Gift taxes and estate taxes are integrated under a single lifetime exemption (often called the unified credit). Lifetime taxable gifts reduce the remaining estate-tax exemption.
– The unified system lets individuals use some or all of their total allowed exemption during life (via taxable gifts) or at death.
Unlimited marital deduction
– Transfers between spouses (U.S. citizen spouse) are generally free from federal gift and estate tax because of the unlimited marital deduction.
– Practically, this lets married couples defer estate tax until the surviving spouse’s death, at which point the survivor’s estate may be large enough to be taxable unless other planning is done.
Which states tax death transfers?
– States with an estate tax (as of the referenced list): Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington — plus the District of Columbia.
– States with inheritance taxes (as noted): Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania.
– Spousal exemptions and other local rules vary by state; some states tax transfers to children or grandchildren under particular conditions.
Common strategies to reduce estate tax exposure
– Make lifetime gifts (subject to gift-tax rules and the unified exemption).
– Use charitable giving to remove assets from the taxable estate (charitable deductions or trusts).
– Place assets in certain irrevocable trusts that remove asset value from the estate (trust choice, terms, and tax consequences matter).
– Use the marital deduction and coordinate planning across spouses so neither unexpectedly triggers estate tax.
– Combine strategies and get professional help. (The best mix depends on family, asset types, and state law.)
Short checklist if you may have a taxable estate
– Estimate your current gross estate value (assets at death, before debts/deductions).
– Check your state’s estate- or inheritance-tax rules.
– Add up prior taxable gifts to see how much of the unified exemption is already used.
– Consider whether transfers between spouses will defer tax (marital deduction).
– Evaluate lifetime gifting, charitable plans, or trust structures with an estate attorney or tax adviser.
– Document beneficiary designations and review regularly as laws and asset values change.
Worked numeric example (step-by-step)
Assum
Assume the following for a simplified, worked numeric example (step-by-step). These are illustrative numbers only; check current law and amounts before applying to a real case.
Assumptions
– Gross estate (fair market value of assets at death, before debts/deductions): $20,000,000
– Debts and allowable deductions (mortgage, funeral costs, administration expenses, charitable bequests if any): $1,000,000
– Prior taxable gifts made during lifetime (amount that used part of the federal unified exemption): $2,000,000
– Federal unified exemption for this example (hypothetical): $12,920,000
– For simplicity: ignore state estate/inheritance taxes and income-tax items, and approximate federal estate tax using the top 40% rate on the taxable base (note: actual federal computation uses a graduated rate schedule; this is a simplification to illustrate mechanics).
Step-by-step calculation
1) Compute net estate before credit/exemption
– Gross estate: $20,000,000
– Less debts/deductions: $1,000,000
– Net estate (after deductions): $20,000,000 − $1,000,000 = $19,000,000
2) Account for prior taxable gifts (uses part of unified exemption)
– Prior taxable gifts: $2,000,000
– Remaining unified exemption available at death = hypothetical exemption − prior taxable gifts
= $12,920,000 − $2,000,000 = $10,920,000
3) Compute taxable estate for estate-tax purposes
– Taxable estate = Net estate − remaining unified exemption
= $19,000,000 − $10,920,000 = $8,080,000
– If this number were negative, there would be no federal estate tax after using up the exemption.
4) Estimate federal estate tax (simplified)
– Using the illustrative flat 40% on the taxable estate (again: real law uses graduated brackets; this is an approximation):
Federal estate tax ≈ 40% × $8,080,000 = $3,232,000
5) Compute net amount available to heirs
– Net to heirs = Net estate − federal estate tax
= $19,000,000 − $3,232,000 = $15,768,000
Alternate scenario: everything to surviving spouse (marital deduction)
– If the decedent leaves the entire estate outright to a surviving U.S.-citizen spouse, the unlimited marital deduction generally reduces the taxable estate to zero for federal estate tax purposes on that death.
– Result (simplified): federal estate tax now ≈ $0 at this death; tax may be deferred until the surviving spouse’s death (or when assets are otherwise removed from the marital deduction estate). Special rules apply for noncitizen spouses, community-property states, and portability elections.
Worked example of a lifetime gift impact
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