The federal estate tax (sometimes called the death tax) is a one-time tax that is imposed at death. If you die with a certain dollar amount of assets, an estate tax return may be required and a tax may be due. If a return is required, it is due 9 months after the date of death.
Sometimes clients confuse the estate tax with an income tax, but it is not a tax on income. It is a transfer tax. Essentially, it is a tax on the wealthy imposed at death.
When does it apply?
In 2019, a federal estate tax is due for all estates with assets of $11,400,000 or more. If you die with a gross estate under $11,400,000, no estate tax is due. If your gross estate is over $11,400,000, you pay a tax on the overage. In general, the tax rate is between 18% and 40%, but it gets to 40% pretty quickly.
The large exemption amount is due to the recent changes in the tax laws that took effect in 2018. The federal estate tax amount used to be $5 million adjusted for inflation. It is now $11 million adjust for inflation so it increases every year. However, beware that it is scheduled to revert back to the amount of $5 million adjusted for inflation on January 1, 2026.
Also, keep in mind that any gifts you made during your lifetime are brought back into your estate in calculating the tax due.
What assets are included in my gross estate?
Assets in your name alone and those that you had control over will be included in your gross estate. For instance, stocks, bonds, and bank accounts are included in your gross estate. So are real estate and business interests. Do not forget about jewelry, household furnishings and artwork.
Clients often think that if they have avoided probated, they have avoided estate tax. That is not true. For instance, life insurance is included in your gross estate if you owned the policy. Retirement assets such as IRA’s and 401K’s are included in your gross estate. Some clients think that these assets are not included in their gross estate because they have a named beneficiary. However, just because you have avoided probate by naming a beneficiary does not mean you have avoided estate tax. If you avoid probate of an asset, it still may be included in your gross estate depending on the level of control you had over the assets.
Property that is jointly owned is also included. If you owned property jointly with your spouse, 50% of the value is included in your gross estate. If you owned property jointly with someone other than your spouse, 100% of the value is included in your gross estate unless you can prove the other party contributed some or all of the value.
If you are the beneficiary of a trust that your parent created for you, that asset may be included in your gross estate if you have certain rights over the trust assets.
What if I leave all my assets to my spouse?
If you are married to a US citizen, you will get an unlimited marital deduction for the assets you leave to your spouse. That means there will be no tax due. You can leave $100 million to your US citizen spouse and no estate tax will be due. However, this is really a tax deferral because the assets will then be taxed on your surviving spouse’s death (assuming anything is left when your spouse dies.)
Does my state have a separate estate tax?
Some states impose their own estate tax which may require additional planning. Massachusetts, for instance, has a $1 million estate tax exemption amount. Florida and New Hampshire have no state estate tax.
Consult your estate planning attorney to discuss your own estate tax liability, and what you can do to reduce the taxes that may be due.