Estate Taxes

Have you ever heard people (usually politicians) refer to the “death tax?”  They are typically talking about the federal estate tax, which is a tax imposed on your estate after you pass away.  (Some states also impose a separate state estate tax.  As of 2016, Texas does not.)

Our clients often anxiously inquire about whether estate taxes will devour their estate, leaving nothing for their family and business.   Their anxiety is warranted because the estate tax is brutal—it has been as high as 55%!

Fortunately, the estate tax affects very few Americans these days thanks to the available estate tax exemptions.

What is a tax exemption?

Generally, a tax exemption refers to a portion of an otherwise taxable asset that is exempt from taxation.  Within the context of the estate tax, to illustrate, if the estate tax exemption was $100,000.00, then the first $100,000.00 of your estate would pass tax free.  It’s exempt.  Thereafter, anything beyond that $100,000.00 would be subject to the estate tax.  So if your estate was worth $200,000.00, and if the estate tax was 50%, then your first $100,000.00 would pass tax free, and the remaining $100,000.00 would pass subject to a 50% estate tax, leaving your family with only $150,000.00.  In short, the government just took $50,000.00 after you died as a farewell gift of sorts.

As recently as the year 2001, the estate tax exemption exempted the first $675,000.00 of your estate.  This subjected many middle class families who owned a home and had saved for retirement their entire lives to the estate tax.  It was particularly devastating to small business owners and especially to their employees who often lost their jobs because the deceased’s business often had to be liquidated in order to pay the estate tax.

Fortunately, as of 2016, the estate tax exemption is $5,450,000.00.  Yes, it is over five million dollars per person.  This is great for 99% of Americans because very few families have assets that exceed that large amount, and hence their estates are  not subject to the estate tax.  In other words, their families will receive the exempted asset value outright (for estate tax purposes and assuming there are no other problems with the estate).

Although you and your family might not have to currently worry about the estate tax, it is worthwhile to keep yourself abreast of tax law developments.  It is possible that the law will change in the future and that your estate might be taxable.  If so, it is definitely worth preparing a complex estate plan that can legally reduce your estate’s tax burden.

2018 UPDATE:  The federal individual estate tax exemption was raised to over $11,000,000.00 and is pegged to increase with inflation.  This means that a married couple enjoys over $22,000,000.00 of estate tax exemptions, meaning that the first $22,000,000.00 of a married couple’s estate can effectively pass estate tax-free.  Very few American families would even own estates subject to a tax for which the first $22,000,000.00 is exempt–but it would be a good problem to have!