The estate tax, which is sometimes called the “death tax,” is a government fee that is imposed on the property of a person when they die and their property is transferred to their beneficiaries. The tax is not imposed on everyone and typically only affects a small percentage of the country’s wealthy population.
The federal government and several state governments impose estate taxes. For 2019, the federal estate tax applies only to people whose property totals are over 11.4 million dollars. State rates vary. The taxed property is not limited to real estate, such as a house or the land it sits on. In addition to real estate, property includes all assets of a deceased person such as cash, jewelry, stocks, automobiles and boats, etc.
Another way to think of an estate is the total worth of an individual. Add up all their assets and subtract any debt or liabilities, and this dollar figure represents their estate. An estate can be associated with someone that is alive or dead.
When a person creates a last will and testament, they typically assign a personal representative, otherwise known as the executor in the legal document. Upon the death of the individual, the job of the executor is to execute the will and make sure that the estate is handled in accordance with the decedent’s last wishes as well as in accordance with any applicable laws.
The executor has to identify all assets and pay any outstanding debts and pay taxes, including the estate tax. Once payments from the estate have been made the executor distributes the remaining assets to the beneficiaries of the will.
If a person dies without a will (“intestate”), the court appoints a personal representative to carry out the process of closing out a person’s estate upon their death. This person is known as the administrator.
The estate’s personal representative must pay the estate taxes from the deceased person’s estate funds, whether it be the executor or the administrator. The personal representative is responsible for submitting these payments to the Internal Revenue Service and any state tax authorities, when applicable, in a timely fashion. The federal government requires estate taxes to be paid within nine months of the individual’s death. A six month extension may be granted for filing the documentation, but the nine month payment deadline is quite strict. States may vary on the estate tax payment timeframe however several states also follow the federal government’s nine month rule.
If a deceased person’s assets total more than 11.4 million dollars, the overage will be taxed by the government. The federal government can tax up to 40 percent on that overage. This can amount to hundreds of thousands of dollars. The federal government and the state’s that do charge an estate tax have various deductions and other exclusions that may apply in calculating the amount owed.
It is important to note that if the spouse of the deceased inherits the estate, the surviving spouse is typically exempt from the estate tax.
It is possible to reduce the estate tax and this can be done by planning ahead. Some possible ways to reduce the estate tax include:
- Donate to a charity or charities: The amount donated can typically be deducted and reduce the amount of the estate while benefiting a worthy cause;
- Gift to family and or friends: This may reduce the estate tax but keep in mind some states have a gift tax;
- Spend your money: By spending the money you are able to take advantage and enjoy your earnings while reducing the potential of future taxes for your beneficiaries; and
- Move money into a trust account. Some trust accounts are not subject to the estate tax.
Other deductions and exclusions may apply depending on where you live. There are currently thirteen states: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. The District of Columbia also has its own estate tax.
It is always a good idea to plan ahead when it comes to your estate. A will is a vital part of an estate plan that brings peace of mind and financially affords security to those you leave behind. If you have questions regarding creating or updating a will and how you are affected by the estate tax speak with an experienced estate attorney today.
The tax laws that apply to estates can be overwhelming and burdensome. Proper estate planning is essential to lessen the effects of the estate tax. A knowledgeable attorney will be able to assist you in crafting your estate plan and provide you with the best options tailored to the specific needs of your estate.