Estate taxes are taxes that are owed and paid by your estate after you die. Estate taxes are imposed on individuals by the federal government. They are also commonly known as a death tax, or inheritance tax. If property or assets are transferred to another individual upon the death of the estate’s owner, this estate tax may be imposed. Most estates will not owe any estate taxes, whether federal or state, due to their size. As of 2020, estate taxes are generally only paid when an individual’s estate is worth more than $11.58 million. The estate tax rate can be up to forty (40) percent given the size of the estate.
Gift taxes are taxes paid on gifts that are made over the course of a person’s life. When property or assets are transferred from an estate owner to another while the estate owner is still alive, a gift tax may be imposed. There is a lifetime exemption of $11.58 million as of 2020. This means that, if you give less than $11.58 million over the course of your life, you will not have to pay federal gift taxes.
Additionally, you can give up to $15,000 each calendar year to an individual in cash or property gifts completely free of tax. Importantly, this annual exclusion of $15,000 would not contribute towards your $11.58 million lifetime gift limit. The gift tax only applies to the amount in gifts that you make that are in excess of the $15,000 annual exclusion. Such amounts are then decreased from your lifetime exclusion of $11.58 million by the Internal Revenue Service (“IRS”).
As can be seen, whether or not the gifts that you make, or the estate that you leave behind, will be subject to federal taxation depends on a few different factors. As previously mentioned, the main factor in deciding whether you are subject to an estate tax is the total value of your estate.
What Are the Federal Estate Tax Laws, and Have Estate Taxes Been Repealed by Congress?
As noted above, the purpose of federal estate taxes is to tax your right to transfer property at your death. Also noted above, as of 2020, federal estate taxes may be imposed on an estate by the federal government, with estate taxes reaching up to forty percent of the total value of an estate. Once again, the federal government may only tax your estate if the gross value of your estate exceeds your lifetime exclusion. As previously mentioned, as of 2020, this number is $11.58 million for individuals, or $23.16 million for married couples.
Another federal estate tax law allows for a marital deduction, in which a decedent’s estate passes tax free to their living spouse. Therefore, upon the death of the first spouse, property will pass to the surviving spouse under the marital deduction tax free. However, that property will then become a part of the surviving spouse’s estate. This means the value of the estate left when the second spouse dies will be subject to federal or state estate taxation.
Are There State Estate or Inheritance Taxes?
In short, yes. In addition to the possibility of federal estate taxes, some states in the U.S. also collect an estate and/or an inheritance tax. As of 2019 the following states are states that collect an inheritance tax:
- New Jersey; and
Importantly, each of the aforementioned states has different laws regarding who is exempt from state inheritance tax. This means that certain individuals or estates may not have to pay an estate tax, even in the states listed above.
What Is a Qualified Terminable Interest Property Trust?
A qualified terminable interest property trust, or “QTIP” trust, is a specific type of marital trust designed for one spouse to provide for the care of the surviving spouse after their death. Importantly, QTIP trusts help the executor of your estate avoid state and federal taxation upon your death. QTIP trusts are generally set up to provide income to a surviving spouse upon the death of the first spouse.
Because the first spouse’s assets were transferred to the QTIP trust prior to their death, the executor of the estate of the deceased spouse may elect to claim the marital deduction for the amount of money transferred to the estate or may choose not to claim the deduction. This means that QTIP trusts provide a flexible way for the executor of an individual’s estate to minimize the possibility of that individual owing an estate tax upon their death. As such, QTIP trusts, and marital trusts in general, are important estate planning tools.
Do I Need to Hire an Estate Planning Attorney?
As can be seen, estate law is often complicated due to the changing nature of both federal and state tax laws. Additionally, proper estate planning is essential in order to make sure your estate is disposed of according to your wishes, as well as ensuring that your estate does not owe estate taxes upon your death. There are numerous estate planning tools that can ensure that your estate is not subject to federal or state taxation.
Therefore, it is important to consult with a well qualified and knowledgeable estate planning attorney in order to protect your assets upon your death. An experienced estate planning attorney can advise you on how to avoid estate taxes by establishing a trust or making gifts throughout your lifetime. Additionally, they can draft the necessary documents on your behalf.