The federal estate tax is a tax on the transfer of wealth, and the tax rate can reach up to 40%. These taxes can be minimized or even avoid entirely through proper estate planning, thereby saving your heirs a significant amount of money.
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 (currently up to 40%).
Beginning of the estate tax phase-out
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 |
Estate Tax Exclusion Amount |
Maximum 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The estate tax was repealed on January 1, 2010.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%.
2010 was a good year to go
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 estate taxes that year.
The federal estate tax exclusion from 2011 to 2017
From 2011-2017, the federal estate tax exemption amount continued to rise steadily:
|
Year of Death |
Estate Tax Exclusion Amount |
Maximum 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% |
|
2017 |
$5,490,000 |
40% |
In 2018 and pursuant to President Trump’s Tax Cut and Jobs Act of 2017 (TCJA), the exemption rate doubled – eliminating the estate tax for all but the very wealthy. Less than 2,000 people (fewer than 0.1 percent of those who died last year) were subject to the tax.
The federal estate tax exclusion doubles under the Tax Cut and Jobs Act
On January 1, 2018, the amount exempt from estate taxes went from $5,490,000 to $11,180,000 per person, with the maximum estate tax rate remaining at 40%.
|
Year of Death |
Estate Tax Exclusion Amount |
Maximum Estate Tax Rate |
|
2018 |
$11,180,000 |
40% |
|
2019 |
$11,400,000 |
40% |
Note that the TCJA has a sunset provision, meaning that absent further changes in the tax law, the federal estate exclusion amount will revert back to the 2017 figure in the year 2026.
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 2019, they can leave up to $22,800,000 ($11,400,000 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 the portability rule.
State estate taxes
Currently 12 states (Washington State, Oregon, Minnesota, Illinois, New York, Vermont, Maine, Rhode Island, Connecticut, Maryland, and Hawaii) as the District of Columbia impose estate taxes on the state level, and six states collect an inheritance tax (Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey and Maryland). Note that New Jersey and Maryland impose both.
State estate tax exemption amounts vary widely, and estate tax rates in some states are as much as 20%.
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.