The Federal Estate Tax Exemption

The estate tax is a tax on the transfer of wealth. If you pass away in 2016, for example, any amount in your estate that exceeds $5,450,000 (minus deductions) could be taxed at a rate of up to 40%. Proper estate planning can therefore save your heirs a significant amount of money.

Background on the estate tax and exemption

Throughout history, estate and inheritance taxes have been enacted to provide governments with an additional source of funding and to prevent the concentration of wealth in a small number of powerful families. The current estate tax structure was initiated following enactment of The Revenue Act of 1916, and levies tax on a decedent’s estate as opposed to directly on the beneficiaries. It works by exempting a certain amount of the decedent’s net worth from estate taxes, but taxing any amount above that figure at a very high rate.

In 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001, which was designed to phase out the estate tax by 2010. The amount in a deceased person’s estate that was exempt from estate taxes subsequently rose steadily from year to year, while the maximum estate tax rate decreased:

Year of Death

Amount Exempt from Estate Tax

Max. Estate Tax Rate

2001

$675,000

55%

2002

$1,000,000

50%

2003

$1,000,000

49%

2004

$1,500,000

48%

2005

$1,500,000

47%

2006

$2,000,000

46%

2007

$2,000,000

45%

2008

$2,000,000

45%

2009

$3,500,000

45%

The estate tax was repealed on January 1, 2010. However, on December 17, 2010 President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act), which reinstated the estate tax retroactively to January 1, 2010. The exemption amount was set at $5,000,000 and the estate tax rate at 35%.

Estate tax and exemptions from 2010 to the present

The 2010 Tax Relief Act gave the heirs of those who died in 2010 the choice of either accepting the reinstated estate tax and receiving a step-up in basis to fair market value under Internal Revenue Code §1014, or opting out of estate taxes altogether but not receiving the step-up in basis. Tax attorneys and accountants made careful calculations to ensure that the best choice was made for their clients. For example, Billionaire George Steinbrenner’s heirs saved roughly $600 million in estate taxes (and got to keep the New York Yankees) because Steinbrenner died in 2010 and they were able to opt out of the estate taxes that year.

Since 2010, the federal estate tax exemption amount has continued to rise steadily, while the maximum estate tax rate has somewhat decreased:

Year of Death

Amount Exempt from Estate Tax

Max. Estate Tax Rate

2010

$0 (but no step up in basis) or $5,000,000

0% or 35%

2011

$5,000,000

35%

2012

$5,120,000

35%

2013

$5,250,000

40%

2014

$5,340,000

40%

2015

$5,430,000

40%

2016

$5,450,000

40%

Portability of the estate tax exemption

The “portability of the estate tax exemption” was included in the 2010 Tax Relief Act to permit a surviving spouse to use any unused amount of their deceased spouse’s exemption. This means that if a married couple dies in 2016, they can leave up to $10,900,000 ($5,450,000 times two) to their heirs free of federal estate tax, without any additional tax planning. Note that both spouses must be U.S. Citizens to benefit from this rule.

State estate taxes

Currently 15 states (Washington State, Oregon, Minnesota, Illinois, Tennessee, New York, Vermont, Maine, Massachusetts, Rhode Island, Connecticut, New Jersey, Delaware, Maryland, and Hawaii) also impose estate taxes on the state level, as does the District of Columbia. Six states have an inheritance tax (Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey and Maryland). Note that New Jersey and Maryland impose both. The exemption amounts vary widely and estate tax rates in some states are more than 15%.

California estate planning attorneys

The attorneys at Moskowitz, LLP, provide estate planning services for individuals and couples that can reduce or even eliminate estate taxes altogether. Contact our San Francisco office for details.