The tax applies to the portion of an estate’s value that exceeds an exemption level.  The estate tax applies to the gross estate which includes financial assets,(like stocks,bonds,etc.),real assets (like homes, land, etc.), share of jointly owned assets and life insurance proceeds from policies owned by decedent. The exemption level and the tax rate have varied extensively over the years.  Most recently, the Tax Cuts and Jobs Act (TCJA) increased the estate tax exemption to $11.2 million for single individuals and $22.4 million for married couples for 2018 to 2025, indexed for inflation.  The top tax rate is 40%.

The federal transfer tax system is comprised of three taxes:
1.) the estate tax, which applies to the transfer of property at death
2.) the gift tax, which applies to the transfer of property while person is living
3.) the generation – skipping transfer tax (GST), which applies to the transfer of property that skips a generation

The estate tax and the gift tax are unified to create an identical tax liability. In other words, they share a credit.  Both the estate and gift tax is cumulative over one’s lifetime.  The total gift tax credit cumulatively used during one’s life reduces the credit available to use against his or her estate taxes at death.  On the other hand, the GST tax is imposed in addition to the estate and gift taxes in order to prevent avoiding estate taxes by transferring assets to younger generations.

An estate includes every asset you own including but not limited to investments accounts, bank accounts, residence, real estate, equity in a business, cash value in an insurance policy, and personal property.  For estate tax purposes, property is designated a fair market value or the price at which property would be bought and sold by a willing buyer and willing seller with both having reasonable knowledge of relevant facts.  The date of the valuation is either the date of death or six months later.  Interest in a family business or other unclear asset valuations often require a professional appraisal.  To calculate your estate, add up your total assets and then subtract your liabilities or debts.  Then subtract the value of any assets that you will transfer to a charity on your death.  If you’re married you can also deduct the assets that will go to your spouse, if he or she is an American citizen.

The portability provision allows a surviving spouse to add any unused portion of a deceased spouse’s exclusion to his or her own exclusion.  For example, a married couple has a 20 million dollar estate.  Since the husband and wife have two equal shares, if a husband dies first, his executor can elect to transfer his unused exclusion of $11.2 million to his wife.  If the wife passes away without any appreciation in estate assets, she will have an estate valued at $20 million and an exclusion of $22.4 million.  She can pass her entire estate free of tax.