The federal estate tax, often referred to as the "death tax," is a federal tax levied on the transfer of the estate of a deceased person. With rates ranging from 18% to 40%*, understanding the estate tax is crucial for effective estate planning. However, with the federal estate tax exemption threshold set at $13.61 million for individuals in 2024, most estates will not be subject to federal estate taxes.

Let’s take a brief dive into the essentials of estate taxes and how to minimize their impact.

Understanding the Federal Estate Tax

The federal estate tax applies to the transfer of the deceased's assets, including cash, real estate, stocks, and other assets. The tax is calculated on the current fair market value of these assets, not their original purchase price. For 2024, estates valued below $13.61 million are exempt from the federal estate tax, a relief for most American families. However, for estates exceeding this amount, planning becomes essential to mitigate tax liabilities.

Strategies to Minimize Estate Tax

For those with estates approaching or exceeding the federal exemption limit, several strategies can help reduce or eliminate estate tax liability:

• Lifetime Gifting: Utilize the annual gift tax exclusion to reduce the size of your estate. 2024, you can gift up to $18,000 per recipient without incurring gift tax.
• Charitable Donations: Gifts to qualifying charities are deductible from the gross estate, potentially reducing estate tax liability.
• Trusts: Certain types of trusts can shield assets from estate taxes while allowing you to control how those assets are distributed to your heirs.
• Relocation: Consider moving to a state without an estate tax if your estate is likely to be affected.

Key Takeaways

• Exemption Thresholds: With the exemption set at $13.61 million for 2024, understanding your estate's value in relation to this threshold is the first step in estate tax planning.
• Marital Deduction: Assets inherited by a surviving spouse are generally exempt from the federal estate tax, thanks to the unlimited marital deduction.
• State Estate Taxes: Thirteen states and the District of Columbia impose their own estate taxes, often with lower exemption thresholds than the federal government. It's crucial to be aware of your state's laws.**

Conclusion

While the federal estate tax affects only a small percentage of estates, understanding its implications is crucial for comprehensive estate planning. By staying informed about the exemption thresholds and employing strategic planning techniques, you can ensure your estate is passed on to your heirs as efficiently as possible.

Reference: NerdWallet "Guide to Estate Tax: Definition, What to Know"

*   For a table of the federal estate tax rates, refer to the article

** For a list of the states that have their own estate tax and their rates, refer to the article