What are Death Taxes?

In addition to the expense and delay of probate, your family may also be liable for death taxes.  There are two types of death taxes: the federal estate tax and the state estate/inheritance tax.  State inheritance taxes vary dramatically from state to state.  The federal estate tax is one of the largest taxes a family will ever have to pay.  It’s a tax on your right to transfer property to others at your death.  Currently, the federal estate tax rates on a taxable estate start at 18% and quickly rise to 40% of every dollar in your taxable estate.

Q: Do all estates pay Federal Estate Taxes?

A: No.  The federal government has given every person in the United States an exemption for estate tax purposes.  The 2017 exemption is $5,490,000. It is indexed to inflation so it will likely rise in subsequent years.  That means that if your estate at the time of your death is less than the exemption amount there will be no federal estate taxes due.  In deciding whether your estate is greater than or less than the exemption amount, the government includes everything you own, even the face value of your life insurance policies.

Q: Is there an Estate Tax Deduction for married people?

A: Yes.  In addition to the personal exemption that everyone gets, the federal government has exempted all transfers of wealth between a husband and wife.  This is called the Unlimited Marital Deduction and it means that regardless of the size of your estate there will be no federal estate taxes levied when the first spouse dies and leaves the estate to the surviving spouse.

Keep in mind, however, that this is merely a postponement of tax.  There will be a tax on the estate when, at the second death, it passes to the children or other beneficiaries.  Since in all probability the estate will continue to appreciate in value, taxes may be paid at a higher rate.

WARNING:  Recent changes in the tax law have eliminated the unlimited marital deduction for surviving spouses who are not U.S. citizens.  Without special planning, all non-citizen spouses are restricted to the tax-free transfer of the personal exemption amount from their deceased spouses.

Q: What if you have a small estate; do you need to worry about estate planning?

A: Yes. While an estate under the exemption is free from federal estate taxes, you will probably not avoid a living probate if you become disabled or a death probate when you die.  Remember, probate and federal estate taxes have nothing to do with each other.  Estate taxes are paid to the federal government for the right to transfer property at your death.  Probate fees and costs are paid to the probate court, attorneys and the personal representatives of your estate for supervising the administration of your estate and distributing assets to your beneficiaries.

Q: How can I create a Living Trust?

A: The first step is to make an appointment for a free, no obligation meeting with one of our estate planning professionals.  You should be prepared to discuss the following issues:

  • How your assets are to be distributed after your death, and
  • The names of the people you want to manage your assets if you become mentally disabled and after your death.