You might think it a strange practice to tax an individual’s right to distribute their own property after passing, but estate taxes constitute an important part of the process, and it’s something you should absolutely understand if only to ensure the right amount of tax is being levied.
Estate taxes are one of the oldest forms of taxation on the books. But, you might not be aware of them if you haven’t dealt with a situation where this sort of tax applies. In a process that can already prove complex or lengthy, knowing the specifics of estate taxes, including what they are, who’s responsible for paying them, and the difference between estate taxes and inheritance taxes, is paramount.
Below, we’ll take a more granular look at the estate taxes and their greater role in the distribution process of an estate.
What Are Estate Taxes?
Estate taxes are a tax levied on an individual’s assets after their death. This is a federal tax, and only applies to estates of a certain size ($12.06 million or more in 2022; up from $11.7 million in 2021). For married couples, that amount is doubled.
Because the amount is so high, the estates of most people will not be liable to a federal estate tax upon death. And while some states have their own estate taxes, they too are only levied on large estates and do not impact a majority of Americans.
Estate Tax Rates
In instances where estate taxes do apply, rates vary based on the total taxable amount. This amount is calculated as the total assets an individual possesses above the $12.06 million threshold. The more money a person has above that amount, the more money the estate tax will apply to—and the higher estate tax rates they’ll pay.
The lowest estate tax rate is 18% for estates that are $0 to $10,000 above the threshold. The highest is a 40% tax rate for estates that are $1,000,001+ above the threshold, plus a base rate payment of $345,800. If you are subject to estate tax, an estate attorney will be able to let you know what your exact rate is and whether you will also owe a base rate payment.
Who Pays Estate Taxes?
As covered in the “what are estate taxes?” section above, only the wealthiest Americans pay estate taxes. In instances where there is a surviving spouse, the estate will be fully transferred to them without any estate taxes levied. When the spouse dies is when estate taxes will be taken out, even if the estate is then transferred to his or her children.
Estate vs. Inheritance Tax
Estate tax and inheritance tax are two terms that often get confused, but there is a notable difference between them.
While estate tax is a percentage of wealth removed from a deceased person’s estate, an inheritance tax is an amount that an individual owes for inheriting someone else’s wealth. Similar to with estate taxes, inheritance taxes do not apply to surviving spouses. They may not apply to children either, depending on the state.
There is no federal inheritance tax. Likewise, only six states in total have an inheritance tax, and only one (Maryland) has both an estate tax and an inheritance tax.
Proposed Changes to Estate Tax Laws
In recent years, there have been a number of proposed changes to the federal estate tax, though it is unclear at this point whether any of these proposals will ever become law.
One proposed change is called the “For the 99.5% Act,” which, among other suggested changes, would lower the estate tax exemption from its current amount of $12.06 million to just $3.5 million. Another proposal, the “Sensible Taxation and Equity Promotion Act,” or STEP, would not lower the exemption amount but would make some changes to how various estate planning techniques play out in relation to the tax.
Neither of these proposals have been enacted, so current estate tax laws still apply.
Want to Know More?
Estate planning and taxes are complicated subjects with a lot of nuance to them. For more information, including a consultation based on your personal estate, please contact our office today to speak to a qualified estate attorney.