Before we look at the estate tax, we should provide a bit of general information about taxation. You might assume that an inheritance would be subject to regular income taxes, but this is not the case. The income does not have to be reported on your annual returns.There is also a step up in basis that applies to appreciated assets that are bequeathed. For capital gains purposes, the value of the assets would be equal to their value at the time that the inheritor assumed ownership of them. The heir would not be responsible for the gains that took place during the life of the decedent.Moving on to the estate tax per se, there is a federal estate tax in the United States, and that’s the bad news. The good news is that your heirs are unlikely to be exposed to this tax unless you are extremely wealthy.It is only applicable on asset transfers that exceed the amount of the exclusion. At the time of this writing, the exclusion amount is over $11 million, and there are ongoing adjustments to account for inflation. The maximum rate of the federal estate tax is a robust 40%, so it is something to be taken seriously if you are a high net worth individual.
The answer is yes and no, depending on where you live. There are some states in the union that have state-level estate taxes. We practice in Kansas and Missouri, and there are no state-level estate taxes in these two states.This does not necessarily mean that you are completely in the clear if you live in our service areas. If you own property in a state that has its own estate tax, you would not automatically be exempt. You could be exposed to that state’s death tax.Since the state exclusions are typically much lower than the federal exclusion, you should definitely obtain all the relevant information if you are in this position. We would be more than glad to help if you have any questions or concerns about state-level estate taxes.
This is a great question, and the practice used to be commonplace among wealthy families shortly after the estate tax was enacted in 1916. In 1924, a gift tax was installed to close this loophole, but it was repealed a couple of years later.Ultimately, the window of opportunity was sealed shut for good when the tax was reenacted in 1932. It has been in place since then, and it is unified with the estate tax, so the exclusion applies to your estate and sizable gifts that you give while you are living.We are using the word “sizable” because there is an additional gift tax exclusion that allows you to give up to $15,000 to any number of people in a given year free of transfer taxes.It is important to understand the fact that there is an unlimited marital estate tax deduction. This allows for tax-free transfers of any amount of property to your spouse while you are living or after you pass away, as long as you and your spouse are American citizens.
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Our doors are open if you would like to discuss taxation or any other estate planning or elder law matter with a licensed attorney. You can send us a message to request a consultation, and we can be reached by phone at 913-262-2000.