You may be working on your Income Tax return about now and know more than you wish about income and deductions, but do you know anything about the Estate Tax? You complete an Income Tax return every year but an Estate Tax return is something you may only encounter once, if ever. Here is some information on the Estate Tax.
The Estate Tax is tax on the value of the assets of someone who has died. The assets are valued as of the date of death and those assets include everything in which the person had an interest. These may include a house, bank accounts, investments, retirement accounts, and life insurance proceeds (even though those proceeds aren’t paid out until after death). The Estate Tax return must be completed and filed, and the tax paid, within nine months of death.
There is a Federal Estate Tax and some States, like Massachusetts, have their own separate tax. There is a threshold below which an estate does not have to pay Estate Tax. The Federal limit is $5.45 million (in 2017). If the estate assets are worth less than that, then there is no Federal tax due and no return required. The Massachusetts exemption is $1 million. Thus an estate of $2 million would have to file and pay Massachusetts but not Federal Estate Tax.
There is no Estate Tax between a legally married couple. The unlimited marital deduction eliminates the tax on assets that pass to a spouse. The size of the estate (and the amount of the Estate Tax) can also be reduced by various deductions such as amounts paid to charities and allowable expenses of the Estate.
In conjunction with the Estate Tax there is a Gift Tax. To make the Estate Tax work, which taxes assets at death, there has to be a Gift Tax, that taxes the making of gifts during life. If there were no Gift Tax then everyone could just give everything away sometime before death and no one would ever pay the Estate Tax. The Gift Tax has the same lifetime exemptions. There is also a yearly exemption of $14,000. You can make as many yearly gifts up to the exemption amount as you wish and you will not use up any of your lifetime exemption. If you go over the yearly exemption amount, you may use up some of your lifetime exemption.
Most people won’t ever have to pay an Estate Tax. Either their assets will be under the exemption amount or they will find some other way to avoid the tax. There are various tools such as Trusts that can be used to help reduce or eliminate the Estate Tax. If you have an estate that is larger than the exemption amounts, then you should see your Estate Planning Attorney and figure out if there are planning tools that are right for you.