The estate tax is a tax on transferring assets from a deceased person to their heirs or beneficiaries. The federal estate tax in the United States is imposed on the transfer of the taxable estate of every decedent who is a US citizen or resident. The taxable estate includes all assets that the decedent owned or controlled at their death, such as real estate, investments, and personal property.
The history of the US estate tax dates back to 1797, when Congress imposed a tax on the value of legacies and inheritances. Since then, the estate tax has undergone numerous changes and revisions. In its current form, the federal estate tax was first enacted in 1916 and has since been subject to many amendments, including a temporary repeal in 2001.
Estate tax planning is an essential part of comprehensive financial planning. Proper estate planning can minimize the impact of estate taxes on an individual’s estate and ensure that their assets are distributed according to their wishes. Estate planning can also help reduce family conflicts and provide financial security for surviving family members.
How Estate Tax Works
To understand how estate tax works, knowing about exemptions and thresholds is essential. The current federal estate tax exemption is $13.61 million per person, meaning any estate worth less than this amount is not subject to estate tax. The estate tax exemption is adjusted annually for inflation, which may increase or decrease depending on the inflation rate.
For estates that exceed the exemption threshold, the estate tax is calculated based on the estate’s taxable value. The taxable value is determined by subtracting any debts, funeral expenses, and estate administration costs from the estate’s total value. The resulting amount is subject to the estate tax rate, which ranges from 18% to 40%, depending on the estate’s value. It’s important to note that the estate tax is a progressive tax, which means that the tax rate increases as the value of the estate increases. For example, if an estate is valued at $15 million, the first $13.61 million is exempt from the estate tax, and the remaining amount million is subject to a rate that increases until it reaches 40% for all amounts in excess of $1 million over the exemption amount. The progression looks like the following:
| Federal Estate Tax Rates | ||
| Taxable Amount | Estate Tax Rate | What You Pay |
| $1 – $10,000 | 18% | 18% on balance |
| $10,000 – $20,000 | 20% | $1,800 base tax;
20% on Taxable Amount |
| $20,000 – $40,000 | 22% | $3,800 base tax;
22% on Taxable Amount |
| $40,000 – $60,000 | 24% | $8,200 base tax;
24% on Taxable Amount |
| $60,000 – $80,000 | 26% | $13,000 base tax;
26% on Taxable Amount |
| $80,000 – $100,000 | 28% | $18,200 base tax;
28% on Taxable Amount |
|
$100,000 – $150,000 |
30% |
$23,800 base tax; 30% on Taxable Amount |
| $150,000 – $250,000 | 32% | $38,800 base tax;
32% on Taxable Amount |
| $250,001 – $500,000 | 34% | $70,800 base tax;
34% on Taxable Amount |
| $500,001 – $750,000 | 36% | $155,800 base tax;
36% on Taxable Amount |
| $750,001 – $1 million | 38% | $248,300 base tax;
38% on Taxable Amount |
| $1 million + | 40% | $345,800 base tax;
40% on Taxable Amount |
One important consideration in estate tax planning is the concept of “portability,” which allows a surviving spouse to use any unused portion of their deceased spouse’s estate tax exemption. This means that if one spouse dies with an estate worth less than the exemption threshold, the surviving spouse can use their unused exemption to increase their exemption amount. However, to take advantage of portability, the surviving spouse must file an estate tax return for the deceased spouse’s estate. Another factor to consider in estate tax planning is the potential impact of state-level estate taxes, which can vary widely depending on the state.
Currently, 12 states and the District of Columbia have an estate tax, and some have exemption thresholds lower than the federal exemption. You can consult an estate planning attorney or financial advisor to understand your estate plan’s state-specific tax implications.
Pros and Cons of the Estate Tax
The estate tax is a controversial topic that has been debated for decades. Supporters argue that it promotes wealth redistribution and helps fund government programs, while critics contend it is unfair and can discourage entrepreneurship. Understanding the pros and cons of the estate tax can help individuals and families make informed decisions about their estate planning strategies.
Here are some of the critical arguments for and against the estate tax:
| Pros of Estate Tax | Cons of Estate Tax |
| Promotes wealth redistribution and can reduce income inequality | Can be seen as unfair or punitive, as it may be viewed as a double taxation of wealth that has already been taxed |
| Encourage wealthy individuals to transfer assets during their lifetime instead of waiting until death, which can provide tax benefits and allow for greater control over the distribution of assets | May be subject to political changes and uncertainty, as Congress and the President can change estate tax laws and rates |
| Prevent the accumulation of intergenerational wealth and promote merit-based wealth acquisition | Difficult to administer and enforce, as wealthy individuals may use legal and accounting strategies to minimize or avoid estate taxes |
| Helps fund government programs and public goods | May be seen as a burden on middle-class families who may have inherited assets that have increased in value over time and are now subject to estate tax |
| Provide an incentive for charitable giving, as donations to qualifying charities can reduce the taxable value of an estate | Discourage entrepreneurship and small business growth, as heirs may be forced to sell assets or take on debt to pay estate taxes |
Estate Tax Planning Strategies
Estate tax planning is essential to overall financial planning for individuals and families with significant assets. By developing a comprehensive estate tax plan, individuals can ensure their wealth is distributed according to their wishes while minimizing the tax burden on their heirs.
One common estate tax planning strategy is the use of trusts. Trusts can help reduce estate taxes by removing assets from an individual’s taxable estate while allowing the individual to maintain control over the assets during their lifetime. For example, a revocable living trust allows an individual to transfer assets into a trust, which can then be managed and distributed according to the individual’s wishes. Because the assets are no longer owned by the individual, they are not subject to estate tax upon their death.
Lifetime gifts and charitable giving are also effective estate tax planning strategies. By making gifts of assets or cash during their lifetime, individuals can reduce the size of their taxable estate and take advantage of the annual gift tax exclusion. The annual gift tax exclusion allows individuals to give up to $18,000 (2024) per recipient per year without triggering gift tax. Additionally, charitable giving can reduce the size of an individual’s taxable estate while also providing tax benefits for the individual.
Estate tax planning strategies should be developed with a financial advisor or estate planning attorney. These professionals can provide guidance on the most effective strategies for individual circumstances and help ensure that estate plans are following state and federal laws.
