When a loved one passes away, it is important to ensure that all of his or her affairs are in order. This includes paying off any debts, as well as paying any necessary federal and state taxes required on an estate. There is an estate tax, which taxes both the transfer of assets from the decedent to the beneficiaries as well as an income tax on income generated by the assets of the estate.
What is the Estate Tax?
In simple terms, the estate tax is a federal tax placed on all estates over a certain total valuation. As of 2022, that amount is $12.06 million for unmarried individuals and $24.12 million for married couples. Once they exceed that base valuation, the federal government will impose a graduated tax rate on all assets from the estate, up to a maximum of 40% on all assets that exceed the exemption by $1,000,000.
“This can have a substantial effect on your estate if your total estate valuation goes above the federal exemption, and significantly reduce the inheritance your heirs will receive when you pass away,” explains Jason Smolen.
How Can Someone Know if the Estate Tax Will Affect Them?
Determining whether you may qualify for the estate tax is not as simple as you think. “Certain types of assets are not counted towards that limit, and there are deductions you can make to reduce the overall value of your estate,” explains Daniel Ruttenberg. These deductions include, but are not limited to:
- Certain outstanding debts
- Legal and administrative fees
- Funeral costs
- Charitable bequests
- Money paid towards satisfying state taxes
What Other Tax Issues Can People’s Estates Face?
In addition to the estate tax, there is also a gift tax, which has an annual limit of how much money or property can be gifted to any one person. For 2022, that amount is $16,000 per person.
If the decedent made gifts in excess of the annual exclusion amount, it will reduce the lifetime exemption amount. In addition, all estates are subject to the tax laws of whatever state the estate was established in, meaning you may need to face additional tax liability.
How Can One Minimize the Effect of the Estate Tax?
There are a number of ways that people can potentially protect their estates from the estate tax if they are in danger of being subjected to it. A common method is to place money or property from the estate into a trust designed to remove it from your estate, where it may be protected from both taxation and debt collection to a significant extent.
To find a solution that best fits your needs, contact Jason Smolen at jdsmolen@smolenplevy.com or Daniel Ruttenberg at dhruttenberg@smolenplevy.com.
About the Authors
Jason Smolen
Jason Smolen is a founding principal of SmolenPlevy. Smolen’s knowledge of complex estate and business issues has drawn the attention of ABC News, USA Today, E! Online, Realty Times and the Bank of America Small Business Online Community. Mr. Smolen is a graduate of the City College of the City University of New York and the George Mason University School of Law. Smolen also serves as a board member of a local citizens association and recently co-authored an article titled Why You Should Think About Spousal Limited Access Trusts (SLATS).
Daniel H. Ruttenberg
Daniel H. Ruttenberg, JD, CPA, LLM is a principal with the firm. Mr. Ruttenberg received his Bachelor of Science degree with a double major in Accounting and Finance from the University of Maryland. He earned his Juris Doctor with Honors from George Mason University School of Law and his Master of Laws in Taxation with Distinction from Georgetown University Law Center. Mr. Ruttenberg also served as the Director of the Fairfax Bar Association (FBA) for seven years. During this period, he was also elected president – the youngest in FBA history and served as a member of the Board of Directors for the Fairfax Law Foundation.
