The estate tax is assessed on money and property transferred to beneficiaries or heirs from highly valued estates and even then, a large part of an eligible estate is exempt from tax.
Recent comprehensive federal tax reform legislation had a major impact on the estate tax. Specifically, it raised the size of an estate exempt from federal estate tax from $5.49 million in 2017 to $11.18 million in 2018 (double for married couples), adjusted for inflation annually going forward.
When a person dies, his or her taxable, net estate must be calculated. First, add together the fair market value of all assets at death (money, real estate, vehicles, personal property and others) to determine the size of the gross estate. Then, subtract total liability (loans, mortgages, credit cards and administrative expenses of the estate as well as certain IRS-approved charitable trusts, and transfers for the benefit of a citizen spouse) to arrive at the taxable value of the estate for estate tax purposes.
Finally, add back into the taxable estate the value of any lifetime gifts that were over the annual amount exempt from gift tax and for which gift tax was not paid.
Lifetime gifts can reduce the overall estate to avoid estate taxation. Gifts can also be meaningful from a personal standpoint as the taxpayer can provide needed support or a thoughtful gift for a child, grandchild or other loved one.
Beginning in 2018, a U.S. taxpayer may give up to $15,000 (in cash or in property) tax free as a gift to any individual annually, with no limit on the number of recipients. For a married couple together, the limit is $30,000. Federal gift tax is due for amounts gifted above these limits and if not paid during the taxpayer’s life, must be added back into the size of the taxable estate after death.
Other techniques can help reduce future estate tax liability like the creation of certain kinds of trusts. Consulting an experienced legal advisor is especially important if estate and gift taxes could present issues for your estate. To further complicate an already complex topic, the new, higher exemption is only in effect through 2025, unless additional legislation changes this temporary provision.