Estate Tax for Beginner: An Easy to Read Guide to Estate Taxes

Posted On April 17, 2019

Many politicians use the words “death tax” to refer to a tax on your estate. This tax is the tax you pay to transfer your estate to your heirs upon your death.

It’s a highly contested political issue many Americans don’t completely understand.

So, will you have to pay estate taxes? If so, how much? What does it mean for your heirs?

Here’s a simple guide to this little understood, and yet controversial tax. 

You May Have No Estate Tax at All…

The estate tax brackets range from 18% for estates valued under $10,000 to 40% for estates valued over $1 million. There is a catch.

There is a lifetime exemption amount of up to $11.18 million. That means you can leave up to that amount to your heirs before the estate pays a tax.

If your estate is valued more than the exemption amount, it will only pay taxes for the amount over the exemption amount.  

Keep in mind that this amount is per person. Married couples can leave up to $22.36 million to their heirs with no tax.

The only people paying a tax on their estate are those who would fall into the 40% tax bracket. Even then, there are generous allowances for gifts.

Unrealized Capital Gains May Be Taxed

Unrealized capital gains account for as much as 55% of the total tax revenue from estates because the IRS doesn’t tax investment profits until you sell and “realize” the gains.

Depending on how you plan your estate, these investment gains and losses may be subject to taxation.

For example, you might transfer a valuable asset into an irrevocable living trust to reduce your taxable estate upon your death.

The Individual States with Their Own Estate Tax

Depending on where you live, your estate could be subject to state taxes. Keep in mind that state taxes may come with different exclusion amounts.

When you get around to estate planning, be sure to discuss these matters with your estate lawyer. Your lawyer can help you plan the best course of action for your estate.

In the state of New York, all estates valued more than $5.25 million will pay a 3.06% tax. And, those valued over $10.1 million will pay a 16% tax. The escalation you’re seeing is a graduated tax.

Estate Planning is Essential

Estate planning is important for estates of all values. However, it becomes even more important as the estate becomes more valuable and complex. Each estate will need its own considerations.

You should consult an estate planning lawyer to help you get your affairs in order before you die. This one step alone will save your heirs tons of trouble, and quite literally a lot of expenses/missed inheritance, following your passing.

Contact us today to request an estate plan consultation.