The federal estate tax can take a heavy toll your legacy if your estate is going to be exposed because it carries a 40 percent rate. Fortunately, most people do not have to pay the tax, and we will provide the details in this post.
Estate Tax Exclusion
There is a federal estate tax exclusion that can be used to transfer a certain amount tax-free before the tax would become a factor on the remainder. A $5 million exclusion was established for 2011 via legislative mandate, and it stayed at this level through 2017.
It was indexed for inflation along the way, so during that year, the exclusion was $5.49 million. In December of 2017, the Tax Cuts and Jobs Act was enacted, and it doubled the exclusion with another inflation adjustment.
The federal estate tax exclusion was $11.18 million in 2018, and after some additional adjustments, the current exclusion in 2021 is $11.7 million.
Even if your estate exceeds this amount, you do not have to be concerned about transfers to your spouse if you are married. There is an unlimited marital deduction that allows you to transfer any amount of property to your spouse free of taxation as long as they are an American citizen.
On the subject of spouses and the estate tax, the exclusion is portable. In this context, the term “portability” is used to describe the ability of a surviving spouse to use their deceased spouse’s exclusion. This means that a surviving spouse would have two exclusions to apply to their estate.
Federal Gift Tax
The logical response to the federal estate tax would be lifetime gift giving, and this was done immediately after the tax was enacted in 1918. In 1924, a gift tax was enacted to end the practice, but it was repealed two years later.
People were able to get around the tax by giving gifts for the next eight years, but in 1932, the gift tax came back for good. It is unified with the estate tax, so the exclusion is a unified exclusion that extends to lifetime gift giving along with your estate.
There are some additional exemptions that can be used to facilitate tax-free transfers. You can give as much is $15,000 to any number of people every year free of the gift tax without using any of your multimillion-dollar unified exclusion.
If you want to pay school tuition for students, you can do so without incurring any gift tax liability. It only applies to tuition, but you could use the $15,000 annual per person exclusion to help with books, fees, and living expenses.
In addition to the educational exclusion, there is a medical exemption. You can pay health care expenses and health insurance premiums for others in a tax-free manner.
State-Level Estate and Inheritance Taxes
If you live in some states, you have to be concerned about a state-level estate tax on top of the federal tax. The exclusions in the states that have estate taxes are lower than the federal exclusion, so you can be exposed to a state estate tax even if you are exempt on the federal level.
We do not have a state estate tax in Tennessee, and there are no state-level estate taxes in Mississippi or Arkansas. However, if you own valuable property in a state with an estate tax, it could apply to your estate.
An inheritance tax is a tax that can be levied on distributions to each individual nonexempt inheritor. There are six states with state-level inheritance taxes, but the three states that we are licensed to practice in do not have inheritance taxes.
You would be on the hook if you inherit property that is located in one of the six states, and you are not exempt. These states are Kentucky, Nebraska, Maryland, New Jersey, Pennsylvania, and Iowa. The Iowa tax has been repealed, but it will remain in effect to some extent until 2025.
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We are here to help if you are ready to work with a Memphis, TN estate planning attorney to put a custom crafted plan in place. You can schedule a consultation if you call us at 866-997-6325 or 901-763-2500, and you can fill out our contact form if you would rather send us a message.