According to the Internal Revenue Service, the Estate Tax is “a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death.” The property includes cash, securities, real estate, trusts, business interests, and “other assets.”
By any measure, estate taxes are one of the hotly debated and discussed levies, frequently reviled by those facing them or subject to their imposition. Minimizing or avoiding estate taxes may be a taxpayer’s goal, and some strategies can potentially help achieve this.
How Much Impact Does the Estate Tax Have on Your Assets When You Die?
For most people, the federal estate tax will not apply to your assets when you die because the minimum worth for taxation purposes is currently $11.7 million. As a result, according to the Center on Budget and Policy priorities, less than 0.2 percent of U.S. adults who died in recent years have met the threshold, compared to a longer-term average of one to two percent. The Tax Policy Center sets the number even lower for the tax year 2020, at less than 0.1 percent of the 2.8 million people who died.
Don’t States Also Have Estate Taxes?
Yes, twelve states and the District of Columbia impose estate taxes in varying amounts, while six states have inheritance taxes and Maryland levies both. Contrary to common usage, estate and inheritance taxes are not the same. An estate tax is calculated according to the total assets of the decedent. Liabilities are subtracted from the gross value, and the net taxable value is subject to an estate tax, which is the estate's responsibility.
In contrast, an inheritance tax is levied against a bequest to an individual and is usually paid by that person. In some cases, the will can specify that the estate will pay any inheritance tax due. In addition, states with inheritance taxes exempt transfers to spouses, and some also shield children and other relatives. However, if a gift is made in a will to someone subject to the tax, this can substantially impact the recipient.
What’s the Impact of Asset Appreciation on Estate Taxes?
This is a crucial question for investors planning their estate strategies. Currently, assets distributed to a beneficiary in an estate are "stepped-up" to the property's fair market value at the time the beneficiary receives it, as opposed to the taxpayer's adjusted basis. This fact is essential from an estate value perspective since taxpayers may have deferred gains sequentially by employing a reinvestment strategy using 1031 exchanges.
The combination of deferring gains through the 1031 exchange and the step-up in basis for a distribution can potentially allow the estate to retain the appreciated value as it is distributed to the beneficiary or beneficiaries. For that reason, there is ongoing consideration by lawmakers about the financial benefit of reducing the amount of gain that can be shielded with the step-up provision. In any case, for estates that currently exceed the $11.7 million threshold, the amounts over that level are taxed at increasing percentages that gradually rise to 40 percent.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
