What Is Estate Tax?

The federal estate tax is a flat tax that is levied on an estate after an individual passes away. This tax can vary depending on the circumstances of the deceased and for some individuals, it may not even apply.

According to the Internal Revenue Service, estate tax is levied after the fair market value of the deceased’s assets are assessed. The fair market value is not what the deceased payed for the asset, nor is it the personal valuation of the assets. The total amount of assets is calculated as the gross estate of the deceased. Assets that make up the gross estate can include:

  • Annuities
  • Businesses and shares of businesses
  • Cash
  • Financial securities
  • Insurance policies
  • Real estate
  • Trusts

Once the gross estate has been calculated, the value of the estate can be reduced by applying deductions and, in special circumstances, reduction to the value of certain assets. The deductions that may be applied to assets may include deducting the value of mortgages, debts, administration expenses, or property that is passed to surviving spouses and qualified charities. Once these deductions are totaled against the gross estate, then the new total is labeled as the taxable estate.

Once the taxable estate is calculated, the deceased’s lifetime taxable gifts are calculated. This reduced the estate tax deduction amount by however much is left over. Finally, once the estate tax deduction has been calculated and applied, the individual’s taxable estate is reached.

Due to the high number of deductions, most ordinary people pay nothing in estate taxes after they die. 

Key Takeaways

  • Estate tax is a federal or state tax levied against the assets of an individual who has passed away.
  • The federal estate tax is 37% but also includes a number of deductions and exemptions that allow the first $12.06 million to go untaxed as of 2022.
  • For assets that exceed the estate tax exemption amount, there are still methods of transferring property that will prevent taxation.
  • If you want to establish an estate plan that will result in the least possible estate tax being paid, an experienced Trusts & Estates attorney may be able to utilize experience and expert knowledge to improve the outcome of your case.

Estate Tax, Trusts, and Estates

When it comes to estate tax, there is a lot at stake. For most people, estate tax is not something that takes much consideration. 

The IRS only requires those estates that exceed a certain gross estate valuation to file a federal estate tax return.  This amount takes into account prior taxable gifts. In 2022 the estate tax deduction limit is $12.06 million. Individuals who have more than $12 million in assets may find themselves subject to estate tax.

The top rate for Federal estate tax is 37%. This amount can seem very steep in isolation. However, the top estate tax rate only applies to estates that exceed the federal estate tax exemption by more than $5.3 million. In reality, the effective tax rate on the estate of an individual is far lower than the actual estate tax rate. That is because the estate tax rate only applies to the amount of the estate that exceeds the deduction amount.

The goal for individuals with high asset values is to minimize their estate tax that they pay by as much as possible. This can be accomplished through the use of specific estate deductions. For example, there is a deduction known as the unlimited marital deduction.

With the unlimited marital deduction, estate tax does not apply to any assets being transferred to a surviving spouse. The marital deduction only applies to the surviving spouse. Beneficiaries such as children may still have to have their portion of the estate taxed if they do not have a similar deduction to cover their assets.

Even if an estate manages to completely circumvent federal estate taxation, the estate may fall under the domain of a state estate tax. The state estate tax exemptions may be far lower than federal exemptions. State estate taxes only apply in the state in which the deceased passed away. States that have estate tax include:

  • Connecticut - $7,100,000
  • Hawaii - $5,490,000
  • Illinois - $4,000,000
  • Maine - $5,870,000
  • Maryland - $5,000,000
  • Massachusetts - $1,000,000
  • Minnesota - $3,000,000
  • New York - $5,930,000
  • Oregon - $1,000,000
  • Rhode Island - $1,595,156
  • Vermont - $5,000,000
  • Washington - $2,193,000
  • Washington D.C. - $4,000,000

Estates that exceed the exemption threshold will be taxed on a similar basis to income tax. Some states, such as Massachusetts also have a rate of 0% for estates that narrowly pass the estate tax exemption threshold.

Bottom Line

If you are seeking to find the most efficient way to preserve your estate and pay the lowest possible estate tax, you will need the assistance of a trusts & estates attorney. An experienced trusts & estates attorney will utilize their knowledge of the federal and local tax codes in order to deliver you the lowest possible estate tax. 

Additionally, a trusts & estates attorney can also provide services in drafting or revising an estate plan that ensures your wishes are carried out after your passing.

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