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Understanding the Basics for Estate Taxes

Understanding the Basics for Estate Taxes

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The US imposes estate taxes on assets transferred from the estate of a deceased individual to heirs or beneficiaries. In understanding the basics for estate taxes, an estate tax is not the same as an inheritance tax. It’s a tax on the total value of a person’s assets at the date of death. The estate pays the tax before any assets are distributed to beneficiaries or heirs.

In contrast, inheritance tax is based on the value of assets that an individual beneficiary receives. The tax responsibility is on the beneficiary, not the estate, and tax rates can depend on the relationship between the decedent and the beneficiary.

US Estate Taxes Overview

US estate taxes apply only to high-value estates. The amount adjusts annually for inflation, and for 2023 is $12.92 million per individual—higher estate tax exemptions will sunset on December 31, 2025. Projections vary slightly but align with a 2026 estate tax exemption cut in half to about $6.8 million per individual. Any value exceeding the current year’s exclusion limit is subject to tax.

The Internal Revenue Service requires any estate with prior taxable gifts and combined gross assets exceeding the threshold to file a federal estate tax return and pay estate tax. Therefore, any estate valuation in 2023 over $12.92 million per individual will pay tax on the overage amount. Executors, or personal representatives, are responsible for filing the estate’s return and paying any taxes owed by the estate, from the estate, over that year’s exclusion amount.

Unlimited Marital Deduction

A provision in the US Federal Estate and Gift Tax Law allows an individual to transfer an unrestricted amount of assets at any time to their spouse free from tax. This transfer includes the date of death of the transferor.

However, this unlimited deduction from estate and gift tax only postpones the taxes on the property inherited from each other until the second spouse dies. After the surviving spouse’s death, all estate assets over the exclusion amount are subject to the survivor’s taxable estate.

Assets Subject to Estate Tax

The estate tax applies to the fair market value of assets such as cash, real estate, stocks, bonds, and personal property, including art, jewelry, and other collections. Life insurance proceeds paid to a beneficiary are generally not subject to estate tax but may be included in the estate if the deceased owns the policy.

Exemptions and Deductions

Certain deductions and exemptions can help reduce the amount of estate taxes owed. For example, a married couple can pass on their estate to their spouse without incurring estate tax at that time. Additionally, charitable donations made from the estate can qualify as a deduction from the taxable amount.

Reducing Estate Taxes

Estate tax law can be complex, and an estate planning attorney can provide valuable guidance and assistance when minimizing the impact of estate taxes. Here are some ways an estate planning lawyer can help:

  • Creating an estate plan minimizes the impact of estate taxes. An estate planning attorney can help you explore various strategies, such as gifting, trusts, and other tax-efficient structures, to reduce the size of your taxable estate.
  • Reviewing and updating your estate plan and making revisions every year or so ensures it’s optimized to minimize estate taxes.
  • Estate planning strategies can reduce the impact of estate taxes, such as gifting, trusts, and life insurance. These strategies are complex and are customized to each individual’s unique circumstances.
  • Ensuring compliance with tax laws and regulations that govern estate taxes ensures you are taking advantage of all available deductions and exemptions.
  • Helping to file estate tax returns to ensure all necessary information is included and the return is filed accurately and on time.
  • Providing guidance to executors and trustees with a fiduciary responsibility to manage the estate in a way that minimizes taxes and maximizes the value of the assets for heirs and beneficiaries.

An estate planning attorney is a valuable resource for individuals concerned about estate taxes and minimizing their impact.

Estate Taxes by State

In addition to federal estate taxes, some states have their own estate or inheritance taxes. Currently, twelve states levy an estate tax upon your death. Like federal estate tax law, state-level estate taxes can change. There may be additional requirements for exemptions that apply depending on the year. If you are concerned about estate taxes in your state, it’s a good idea to consult with an estate planning attorney for guidance and advice specific to your situation.

Spending Down Your Estate

Reducing the size of your estate can minimize or avoid federal estate tax. Enjoy your wealth if you aren’t afraid of running out of money before you die. Travel, live lavishly, and give your assets to loved ones that may improve their lives while you can enjoy the experience. You can give away your assets to a qualifying charity and deduct them from your estate. Also, you can use an irrevocable trust to shield assets that legally shelter them from federal or state estate taxes. You can even relocate to a more favorable tax environment if you live in a state that levies estate taxes.

Creating a Plan

Your estate planning goals define the steps you take. Establish a clear idea of what you want to happen, to whom you want to give, who will handle your estate, and how estate taxes can be avoided to protect the legacy you leave to your loved ones.

An estate planning attorney can help you gather and organize your financial data to determine your net worth and establish estate tax avoidance strategies, review all existing beneficiary selections, and make updates where appropriate. They help you understand the importance of how you hold title to your property.

Create your estate plan today, knowing you can modify much of it as your family situation changes. Estate taxes may be an important consideration if you have a large estate. By understanding the basics of estate taxes and working with an estate planning attorney, you can ensure your assets transfer to your loved ones in the most tax-efficient manner possible.

This article offers a summary of aspects of estate planning and elder law. It is not legal advice and does not create an attorney-client relationship. For legal advice, contact our Ruston, LA office by calling us at (318) 255-1760.

Tax Reform with Estate Planning

Tax Reform with Estate Planning

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To stay on top of changes to federal estate tax laws, gifts, and generations skipping tax exemptions, it may be necessary to revisit and update your estate plan annually. On the first day of 2026, the federal tax assessment on estates worth at least $11.7 million, indexed for inflation annually, will revert back to pre-2018 exemption levels. Any estate valuation over this amount will trigger a 40% federal estate, gift, and GST tax rate. As tax reform law affects your estate planning strategy, it is wise to review your unique estate situation routinely.

Changing Estate Tax Exemption Amount 2017 – 2025

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Estate Planning Strategies to Deal with New Tax Laws

Even if your current taxable estate is under 12.6 million, you must still plan pivoting strategies for future estate tax changes. When the current federal tax laws sunset on January 1, 2026, the new laws will significantly change various estate planning techniques. Predicting exact numbers is impossible; however, some proposals plan to reduce estate and gift tax exemptions from $12.6 million per individual taxpayer to $3.5 – $6.85 million. Focusing on your plan today can help you position your estate for the changes ahead. Lifetime gifting is a strategy that still makes sense even if you are well below the $12.6 million threshold.

Estate Tax Strategies Designed for Your Situation

Additionally, checking your existing estate plan documents to ensure they will align with your goals is crucial as current federal exemptions can demonstrably affect your plan. For example, suppose your will states an amount equal to your remaining federal exemption will go to a “bypass trust” or “credit shelter” for your surviving family. In that case, the remainder passes outright to your spouse. Therefore, if you die with a $10 million estate today and used no exemption during your life, the whole of the $10 million would pass in trust under current law. Aside from not being aligned with your wishes, depending on your state of residence, this scenario may subject your estate to a higher state estate tax upon your death. Understanding the complexity of these tax laws and how they affect your estate plan is critical for protecting your family’s inheritance.

Gifting Amounts Over the 12.6 M Threshold

Suppose your taxable estate is currently over the $12.06 threshold. In that case, the most straightforward strategy is to begin giving away more money, remembering that current exemption amounts provide a limited opportunity to make these larger tax-free gifts. Gifting strategies remove the gifted asset from your taxable estate and all appreciation on the asset from the gift date until you die. Reviewing your current estate documents with your attorney can identify if these changes are warranted.

Many pre-2018 tax-saving strategies still make sense under the current law. Annual gifting exclusions of $16,000 per recipient, and $32,000 if spouses split their gifts, are permissible without using any lifetime exemptions. Annual exclusions for medical or educational purposes are also a viable strategy remembering that contributions to a 529 education plan will eat into the annual exclusion amount. Known as “Med/Ed” Gifts, variable amounts are gifted for limited purposes. The payment, however, must be made directly to the educational or medical provider. Your estate lawyer can help you understand these gifting “freebies” and how they can complement your estate planning strategy.

Estate Tax Planning with Trusts

Suppose you employ a Crummey Trust strategy for gifting while minimizing tax consequences. In that case, the annual exclusion gift to a trust instead of outright gifting requires a Crummey Trust notice to beneficiaries in connection with the gift. There are many trust types and how they may be useful to your estate depends largely on your family and financial situation. Tax minimizing estate trusts can also include:

Estate Planning and Tax Laws Vary by State

At a state level, your estate taxes will depend on which state you reside in and if you have properties in multiple states. Each state has different gift and estate tax laws. Your estate planning attorney can explain the discrepancies between federal and state law exemptions amending your estate documents accordingly. If you live in a state with estate taxes, it is crucial to address these laws and how they affect your federal estate tax planning strategies.

Because of the decision to sunset existing tax laws, even without Congressional action, the exclusion rate will reduce by half effective January 1, 2026. While federal exemptions are still relatively high, there is a short time frame to reduce your taxable estate through additional gifting or establishing new trusts. Your estate planning attorney can determine how to optimize your gifting strategy and if your estate planning documents require significant changes.

For assistance, please contact our Ruston, LA office by calling us at (318) 255-1760.