Estate taxes are those taxes which are owed and paid by an individual’s estate after they pass away. The federal government imposes these taxes upon individuals.
Estate taxes are also commonly called death taxes or inheritance taxes. If, upon the death of the owner of an estate, property or assets are transferred to another individual, these taxes may be imposed.
It is important to note, however, that most estates will not owe estate taxes, either state or federal, because of the size of the estate. As of 2021, estate taxes are paid only when an individual’s estate is valued at more than $11.7 million. The state tax rate may be up to 40% depending on the size of the estate.
Gift taxes are taxes which are paid on gifts that are made during the course of an individual’s lifetime. When assets or property are transferred from the state owner to another individual during the life of the state owner, a gift tax may be imposed.
As of 2021, there is a lifetime exemption of $11.7 million. This means that if an individual gives less than $11.7 million over the course of their lifetime, they will not be required to pay federal gift taxes.
In addition, individuals are permitted to give up to $15,000 each calendar year to another individual in property tax gifts which are completely free of tax. It is important to note that this annual exclusion of $15,000 does not contribute towards the $11.7 million lifetime gift limit.
A gift tax only applies to the amount of gifts which an individual makes that are in excess of the $15,000 annual exclusion. Those excess amounts are then deducted from the individual’s lifetime exclusion of $11.7 million by the Internal Revenue Service (IRS).
Whether or not the gifts an individual makes or the estate they leave behind will be subject to federal taxation depends on several factors as discussed above. As noted above, the main factor in determining whether an individual will be subject to an estate tax is the value of their estate.
What are the Federal Estate Tax Laws, and Have Estate Taxes Been Repealed by Congress?
As previously noted, the intent of federal estate taxes is to tax an individual’s right to transfer their property at their death. As noted in the previous section, as of 2021, federal estate taxes can be imposed on an estate by the federal government and these taxes may reach up to 40% of the total value of an estate.
It is worth noting again that many estates will not be subject to the taxes because the gross value of their estate will not exceed their lifetime exclusion. As of 2021, the lifetime exclusion for estate taxes is $11.7 million for individuals and $23.4 million for married couples.
There is an additional federal estate tax law which allows for a marital deduction. This law permits a decedent’s estate to pass to their living spouse tax free.
Pursuant to this law, the estate of the first spouse will pass tax free to their surviving spouse under the marital deduction. However, this means that the value of the estate which remains when the second spouse passes away will be subject to federal or state estate taxation.
Are There State Estate or Inheritance Taxes?
Yes, there are state estate or inheritance taxes. In addition to federal estate taxes, some states within the United States also collect estate taxes and/or inheritance taxes.
States which collect inheritance taxes as of 2020 include:
- New Jersey; and
It is important to note that each of these states have their own unique laws which define who is exempt from the state inheritance tax. This means that some estates or individuals in the states listed above may not have to pay an inheritance tax.
There are 11 states which have only an estate tax. These include:
- New York;
- Rhode Island;
- Washington State; and
- Washington D.C.
What is a Qualified Terminable Interest Property Trust?
A trust is an estate planning tool which creates a relationship between three parties through which fiduciary control of property, usually a sum of money, is given by an individual known as the trustor or settlor, to another individual or institution, known as the trustee, for the benefit of other beneficiaries. Any sort of property may be held in a trust.
Trust benefits are typically created by:
- A will;
- An insurance policy;
- A retirement plan;
- An annuity;
- The drafting of a trust instrument; or
- Other contracts.
A trust is often factored in estate planning because it does not pass through the probate system and is governed by the terms under which the trust is created. In addition, trusts are favored for both personal and commercial reasons due to how they provide benefits under various tax laws and also help with the protection of assets.
A Qualified Terminable Interest Property Trust (QTIP) trust is a specific type of marital trust that is designed for one spouse to provide for the care of the surviving spouse after their spouse’s death. It is important to note that QTIP trusts help the executor of an estate to avoid federal and state taxation upon an individual’s death.
A QTIP trust typically serves two main purposes, including:
- Allowing a spouse to attach conditions on their property, rather than simply leaving it to their spouse outright. This is especially useful for a second marriage where the spouse wants to provide for both their current spouse and their children from a previous marriage after they pass away; and
- When one spouse dies, it permits the surviving spouse to decide how much of the deceased spouse’s property should be held in trust in order to maximize estate tax savings. This is helpful for combatting the ever changing laws governing estate taxes.
A QTIP trust is usually set up to provide income to a surviving spouse upon the death of their spouse. Because the assets of the first spouse were transferred to the QTIP prior to their death, the executor of the estate of the deceased spouse can elect to claim the marital deduction for the amount of money which is transferred to the estate or they may choose not to claim the deduction.
This means that the QTIP trust provides a flexible way for an executor of an individual’s estate in order to minimize the possibility of the individual owing an estate tax when they pass away. Because of this, QTIP trusts as well as marital trusts in general are important tools for estate planning.
Do I Need to Hire an Estate Planning Attorney?
It is to your advantage to have the assistance of an estate attorney for any estate planning needs or questions you may have. Estate law is often complex due to the changing nature of both the federal and the state tax laws.
In addition, proper estate planning is essential to ensure that your estate is distributed according to your wishes. Estate planning is also necessary to ensure that your estate does not owe any estate taxes upon your death.
There are many estate planning tools which can be used to ensure that your estate is not subject to federal or state taxation. An estate attorney is best equipped to help you plan your estate and protect your assets upon your death.
Your attorney can provide advice regarding how to avoid estate taxes by establishing trusts or making gifts throughout your lifetime. Your attorney can also draft any estate planning documents on your behalf.