Before you have done any research into the subject, you may assume that all families must pay some type of estate taxes. After all, every financial event in your life seems to be subject to taxation, and you have certainly heard of the so-called “death tax.” In fact, the reality is that the vast majority of estates are exempt from transfer taxes on the federal level.
This is because there is a rather large federal estate tax credit or exclusion. There are annual adjustments to account for inflation, but for the rest of 2019, the amount of this exclusion is $11.4 million. You can pass this much along tax-free, any portion of your estate that exceeds this amount would potentially be taxable. The maximum rate of the federal estate tax is 40%.
Those of the basics, and we will pass along five additional key pieces of information below so that you can come away with a more complete understanding.
Marital Deduction and Estate Tax Exclusion Portability
If you are married, there are some estate tax stipulations that are advantageous. There is an unlimited marital deduction that allows you to transfer any amount of property to your spouse free of taxation, as long as both parties are American citizens.
The estate tax exclusion is portable between spouses. This means that a surviving spouse could use the exclusion that was allotted to his or her deceased spouse.
Gift Tax Closes Loophole
Anyone that is exposed to the federal estate tax would consider lifetime gift giving as a way to get around it. This was what people used to do shortly after the tax was enacted in 1916, but the gift tax was put into place in 1924 to prevent this action. It was repealed a couple of years later, but it returned for good in 1932.
These days, the gift tax and the estate tax are unified under the tax code. As a result, the $11.4 million exclusion is a unified exclusion that includes large lifetime gifts along with estate transfers.
Additional Gift Tax Exemptions
Since there is a gift tax, you may be wondering why you are not forced to pay taxes on the typical gifts that we give to others on holidays. In addition to the large unified exclusion, there is also an annual gift tax exclusion.
This allows you to give as much is $15,000 to any number of gift recipients tax-free in a given calendar year before you would start using a portion of your unified exclusion. You are also allowed to pay medical bills and school tuition for others in a tax-free manner.
State-Level Estate Taxes
The federal estate tax is not the only death tax that can enter the picture in the United States. There are number of different states in the union that impose state-level estate taxes. We practice in Ohio, and there was an estate tax in our state through 2012. The good news is that it was repealed for deaths taking place in 2013 and after, so we are in the clear.
This being stated, if you own valuable property in a state that does have its own estate tax, this would apply to you, even if you are a resident of Ohio. The exclusions are typically much lower than the federal exclusion in these states, so you should look into the details if you are an out-of-state property owner.
Land Rich, Cash Poor
There is some very valuable farmland in our part of the country, and many of these tracts of land have been in families for generations. A family farmer may own hundreds of acres that were purchased a long time ago when prices were much lower than they are today.
As a result, someone in the farming business could earn a relatively modest income while being in possession of extremely valuable property. This is the “land rich, cash poor” conundrum, and the estate tax can potentially force a family to sell the farm to pay the tax.
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We are here to help if you would like to discuss your legacy goals with a licensed estate planning attorney. You can send us a message to request a consultation appointment, and we can be reached by phone at 513-721-1513.
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