Estate taxes are taxes on the transfer of property to your heirs. It’s the estate of the deceased that is liable for the tax. An inheritance tax, by contrast, is a tax on the privilege of receiving property from a decedent. The (living) heir pays an inheritance tax, not the estate of the deceased. There is a federal estate tax and, in some states, a state estate tax. Inheritance taxes, though, are not levied at the federal level. Only six states have inheritance taxes.
Under current law, the estate tax exemption amount is $10,000,000, but such amount is further indexed for inflation. The index adjusted estate tax exemption amount for decedent’s dying in 2020 is $11,580,000 (reduced by the amount of taxable gift, if any, made during the decedent’s lifetime). Under current law, the $10,000,000 estate tax exemption (indexed for inflation) is slated to revert back to $5,000,000 (also indexed for inflation) on January 1, 2026. Under current law, the value of the estate over and above the estate tax exemption amount is taxed at a rate of 40%.
If your estate is valued at an amount greater the estate tax exemption, then it is important to discuss tax minimization strategies with your estate planning attorney. Because the federal estate tax limits are always subject to a change, it is also prudent to stay on top of the laws, and to stay in contact with your estate planning attorney.
Gift Tax
The unified credit concept ties the gift tax and the estate tax together. As mentioned, the lifetime gift and estate tax basic exclusion amount for 2020 is $11,580,000.
Taxpayers use a unified estate and gift tax credit to offset the transfer taxes that would otherwise be paid on the transfer of assets, up to the exclusion amount of $11,580,000. If a taxpayer uses his or her transfer tax credit by making lifetime gifts, the federal estate tax exemption at death is reduced by the amount of the unified credit that was used during life.
Note that annual exclusion gifts do not reduce the unified credit. The annual gift exclusion is currently $15,000. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $30,000 to as many individuals as they choose each year, without reducing their available unified credit.
Generation-Skipping Transfers
The generation-skipping transfer tax (GST) is levied in addition to gift or estate taxes on transfers made to a “skip person.”
A “skip person” is a person deemed to be two or more generations below the generation of the person making the gift to them. A trust will be considered a distribution to a skip person if no distributions from that trust can be made to “non-skip” persons.
For 2020, the generation-skipping tax exemption mirrors the federal estate tax exemption amount and tax rate ($11,580,000 million and 40%, respectively).