If you’ve gone to the effort of creating a thorough and comprehensive Will, and perhaps trust, for your assets, you probably feel confident that you’ve rightfully made things simpler for your family in the event of your death. You’ve taken on the bulk of the work, ideally; all that’s left is for others to abide by instructions and for your beneficiaries to take possession of the inheritance you’ve left. But upon your death, the estate may still be subject to the other inevitability: taxes.
What is an estate tax and how does it work?
An estate tax is a tax imposed upon estates upon their transfer to a new owner after the death of the previous holder. In calculating what the rate of taxation will be, you have to calculate what your Gross Estate is, which is the value of your property according to the current market, not at the price you paid for it. For example, if your home has appreciated considerably over the years or decades you’ve owned it, your Gross Estate is likely to be considerably more than the amount originally spent. The Gross Estate value also includes any financial accounts and insurance policies you have, as well as ownership stakes in any business.
From the Gross Estate, you can derive the net amount of the estate subject to the tax rate by deducting your mortgage and other debt, charitable donations and administration costs for the estate. You can also subtract any property that’s transferred to a spouse after the death of their partner, which isn’t subject to estate tax. Figuring out the estate value for the purpose of taxes is complicated and more than a little confusing. An attorney and a qualified accountant are recommended; this is not a DIY project.
Fortunately, there’s some good news: most estates probably won’t be subject to taxation, depending on value and location.
To start, the federal estate tax exempts estates of less than $11,580,000 as of 2020, so if your collected property falls below that threshold, you aren’t required to file an estate tax return; for those estates over that amount, the tax can run from 18% to 40%. It’s important to note, however, that only the amount above the threshold is taxable; if your estate is valued at $12 million, the tax would be levied only on the $420,000 over the threshold amount.
However, even if you’re exempt from the federal estate tax, you might be facing taxes on the local level. Twelve states and the District of Columbia have estate taxes in place:
Connecticut Hawaii Illinois
Maine Maryland Massachusetts
Minnesota New York Oregon
Rhode Island Vermont Washington
The estate tax threshold amount and rate vary by state, so if you live in one of those locations, be sure to do your research and talk to a professional about what your estate might owe.
The state of residence will also determine if your beneficiaries have to pay an inheritance tax as well. An estate tax is taken out of the estate before the balance is distributed to the named beneficiaries, so for most, there’s no cost to the gift from the estate taxes.
An inheritance tax is a tax paid by the recipient of the inheritance on the amount they received. Fewer states have an inheritance tax — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, with Maryland as the only state to have both an estate and an inheritance tax.
For those concerned about the possibility of the estate tax, or who simply want to see their family enjoy their inheritance while they’re still alive, might wish to make gifts of assets or property to their beneficiaries. Under federal law, you can gift up to $15,000 per individual per year (2020), for as many individuals as you choose; in the case of couples, the limit is raised to $30,000 as two individuals. For gifts of property, the dollar limit is applied to the fair market value of an item, so you can’t claim a lesser price to skirt regulations for a high-value item as a gift.
Fortunately, any gift taxes owed are paid by the gifter, so you won’t be sticking your family with a tax bill to go with the family heirlooms. And while gifts that meet these requirements aren’t taxable, they’re also not tax-deductible, unless they’re gifts to a charitable organization.
If you’re leaving your home or something of great value to your family, they may also be subject to the capital gains tax if they sell the home, depending on when they sell it. A capital gains tax is paid against an increase in value over the purchase price, or in the case of inheritance, the price at the time of death.
Whether you have an estate that rises to the level of taxation or one that provides your family with a modest financial boon, it’s good to be aware of the taxes that exist so that you can take on what you can of the tax burden, or at least prepare your family for what might be owed once your possessions pass to them.
LegalShield lawyers are here to provide guidance with your estate plan
Taxes and estate planning are complex financial and legal matters and seeking advice is highly recommended. Our LegalShield estate planning attorneys can assist; individual membership plans start at $26.95 per month.
LegalShield provides access to legal services offered by a network of provider law firms to LegalShield Members through member-based participation. Neither LegalShield nor its officers, employees or sales associates directly or indirectly provide legal services, representation or advice. See a plan contract at legalshield.com for specific state of residence for complete terms, coverage, amounts, and conditions. This is not intended to be legal or medical advice. Please contact a medical professional for medical advice or assistance and an attorney for legal advice or assistance.
