This wealth transfer 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.), shares 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) of 2017 significantly increased the federal estate tax exemption (to $13.61 million for single individuals and $27.22 million for married couples in 2024) for 2018 to 2025, indexed for inflation.  The top estate tax rate is currently 40%.

The federal transfer tax system comprises 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 even younger generations.

An estate includes every asset you own, including but not limited to investment accounts, bank accounts, residences and other real estate, equity in a business, cash value in an insurance policy, and personal property.  For estate tax purposes, property is designated at fair market value (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, if so elected.  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 to an American citizen, you can also deduct the assets that will go to your spouse.

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, take a married couple that has a $20 million estate.  Since the husband and wife have two equal shares, if the husband dies first, his executor can elect to transfer his unused exclusion of up to $13.61 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 $27.22 million (in 2024).  She can pass her entire estate free of federal tax. (Note that the state might levy an additional state estate tax or state inheritance tax, though.)

***Check back later to see a listing of the states with these additional taxes.***

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