Quick solutions to common estate and gift tax issues.
Questions
Will my estate be required to pay federal estate tax once I pass away?
What is the current federal estate tax rate?
Is it possible to avoid federal estate taxes?
Can’t I simply give away all of my property before I die to avoid inheritance taxes?
Is there an estate tax in certain states?
Is it possible to avoid paying state estate or inheritance taxes?
Table of Contents
Will my estate be required to pay federal estate tax once I pass away?
Most estates (almost 99.9%) do not. Only if your taxable estate exceeds $12.06 million does the federal government levy estate tax upon your death (for deaths in 2022).
Married couples may combine that amount to enjoy a $24.12 million exemption. Furthermore, assets bequeathed to a surviving spouse (as long as the spouse is a U.S. citizen) are exempt from estate tax, regardless of their value.
What is the current federal estate tax rate?
In 2022, the federal estate and gift tax rate is 40%.
Is it possible to avoid federal estate taxes?
Yes. Here are a few of the most well-known:
Gifts that are tax-deductible. You may contribute up to $16,000 per recipient per calendar year (in 2022) without incurring gift tax. You may also pay someone’s tuition or medical costs, or donate to a charity, without incurring gift tax. This minimizes the amount of your estate and, as a result, the future estate tax liability.
An AB trust is one in which couples place their property in trust for their children but grant the surviving spouse the ability to enjoy it for the rest of their lives. This reduces the taxable estate of the second spouse to half of what it would be if the property was left wholly to the surviving spouse. AB trusts, however, are unneeded for most couples because of the $12.06 million personal exemption (for deaths in 2022) and “portability” for spouses. More information on this sort of trust may be found in Nolo’s article Tax-Saving AB (Bypass) Trusts.
A “QTIP” trust, which allows couples to postpone inheritance taxes until the death of the second spouse. However, with the existing high personal exemption and the “portability” of exemptions for spouses, this form of trust is sometimes superfluous.
Charitable trusts include making a significant donation to a tax-exempt charity.
Life insurance trusts allow you to exclude the value of life insurance payments from your estate.
Can’t I simply give away all of my property before I die to avoid inheritance taxes?
The federal gift and estate tax are essentially the same tax. The individual exemption amount applies to property you give away during your lifetime or bequeath to others when you die. In other words, for deaths in 2022, you may transfer up to $12.06 million in property tax-free, either while you’re alive or upon death. This exemption amount increases each year since it is inflation-indexed.
The majority of gifts are tax-free, which means they do not count against the personal exemption level. Gifts of more than $16,000 (in 2022) to any one individual or noncharitable organization are taxed. Making contributions of $16,000 or less, on the other hand, may result in significant estate tax savings if done over time.
Some gifts are free from gift/estate tax regardless of the amount. For example, if your spouse is a US citizen, you may give him or her an infinite amount of property tax-free. A noncitizen spouse may get up to $164,000 (for 2022 — this sum is also inflation-indexed). Any property donated to a tax-exempt organization is excluded from federal gift taxes, as is money spent directly for someone’s medical costs or school tuition.
Is there an estate tax in certain states?
Yes. Even if your estate is too small to be subject to federal estate tax, the state may still take a cut.
The state estate tax. Some states collect inheritance taxes from estates that aren’t large enough to owe federal taxes. In general, the tax rate is much lower than the federal estate tax rate.
In Oregon, for example, estates valued more than $1 million may be subject to state estate tax. Property bequeathed to a surviving spouse, on the other hand, is free from both state and federal estate taxes.
Discover which states have a state estate tax.
Inheritance taxation. A few jurisdictions levy a special tax, known as an inheritance tax, on the property of a dead individual. The rate is determined by who inherits the property; often, property passed to spouses and other close relatives is not taxed or is taxed at a low rate.
Is it possible to avoid paying state estate or inheritance taxes?
If your state charges estate or inheritance taxes, you usually don’t have much choice except to relocate. If you live in two states—winter here, summer there—your heirs may save money if you can establish your legal home in a state that does not levy these taxes.