Will the Estate Tax Apply to You?

There are very few certainties in life, yet the cliche of ‘death and taxes’ seems to be more true with time. After the death of a loved one, many family members are concerned about taxes that may be due; it is not an accident that the disparaging term ‘death tax‘ has caught on with such fervor. This is a real issue for very few, but seems to concern nearly everyone1)As to why, is a pregnant inquiry not relevant to this discussion.


Who is affected by the estate tax, and why?

There is a misconception in the United States that every estate will be taxed. The reality is that less than 0.2% of estates actually owe any “death taxes.” The government implemented the estate tax to prohibit wealthy families from continuing to hand down vast amounts of wealth, mostly from unrealized gains on property or equities, to family members for generations without incurring any tax liability.

When property is inherited, it is worth the fair market value at the time of the decedent’s death. Without an estate tax affecting property, the heir could sell the homestead and avoid tax liability. Congress decided that this was an acceptable outcome for many, but truly wealthy families need to pay for this gain in value prior to the transfer of ownership to the heirs or beneficiaries by way of the estate tax.

Congress clearly defines “wealthy” families as those having more than $5.43 million per person (effectively $10.86 million per couple). This means that any individual with more than $5.43 million, or a couple with more than $10.86 million, will incur the estate tax. The amount of the tax is 40% of any amount that exceeds $5.43 million for an individual, or exceeds $10.86 million for a couple.


Two examples of estate tax law

Parent A dies with $5 million estate in 2014. Parent B dies with $5 million estate in 2015. The heirs or beneficiaries of the estate for parent A and for parent B would not incur any estate tax.

But the reality is that most married couples own their property as joint owners.

For example, Parent A and B own all property as joint owners and the value of the assets is $10 million. Again, Parent A dies in 2014 and Parent B dies in 2015. The heirs or beneficiaries for Parent A would not owe any estate tax in 2014. Likewise, the heirs or beneficiaries for Parent B would not owe any tax in 2015, even though Parent B’s estate exceeds the individual $5.43 million exemption. Congress allows the exemption from the first Parent A to transfer to Parent B allowing the surviving member of the couple to use the entire $10.86 million exemption.

As indicated above, and as you might have suspected, there are very few families in the United States that have accumulated that amount of wealth during his or her life. However, for those fortunate families that have been blessed with such wealth, there are several large loopholes that have enabled many of the largest estates to avoid or significantly decrease estate tax liability.

Footnotes   [ + ]

1. As to why, is a pregnant inquiry not relevant to this discussion
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