Chapter 9 Estate Tax

• Library: Estate Planning Basics (Nolo) (2024 Ed.)

CHAPTER 9 Estate Tax

Federal Estate Tax Exemptions

Property You Leave to Your Spouse

Gifts to Charities

State Estate and Inheritance Tax

Gift Tax

The Annual Exemption

The Marital Deduction

Gifts for Medical Bills or School Tuition

The Federal Income-Tax Basis of Inherited Property

After some years of uncertainty, Congress settled on long-term laws for federal estate taxes. The two basic rules are:

• Every person has a personal exemption from federal estate tax. The personal exemption for 2024 is $13.61 million. This amount increases each year based on the annual rate of inflation.
• All property left to a surviving spouse is exempt from federal estate taxes.

These two rules mean that very, very few estates will have to pay any federal estate tax. Indeed, the vast majority of estates—99.9%—don't pay any federal estate taxes. If tax must be paid, the tax rate starts at 40%.

Additionally, a few states impose an inheritance tax on the property of a deceased person who lived or owned real estate in that state. And a handful of states levy their own state estate taxes that apply in addition to state inheritance taxes and federal estate taxes.

No Income Tax on Inherited Property

Generally, beneficiaries don't have to pay income or capital gains tax on the worth of the property. (One exception is funds in most individual retirement accounts; see "Retirement Plans and Taxes" in Chapter 8.) However, after a person inherits property, any income subsequently received from the property is regular income and is subject to income tax.

Federal Estate Tax Exemptions

Several federal tax law exemptions and deductions allow you to leave substantial amounts of property free of estate tax. The most important of these are:

The personal exemption. This exemption allows you to leave property worth up to $13.61 million free of estate tax, no matter to whom you leave the property. If you have made taxable gifts during your life, the amount of the personal exemption will be reduced accordingly. (See "Gift Tax," below.)

The marital deduction. This exemption allows you to leave any amount of property to your spouse tax-free. This exemption applies only to surviving spouses who are citizens of the United States.

The charitable deduction. This exempts all property you leave to a tax-exempt charity. (See "Gifts to Charities," below.)

"Portability." The personal exemption is "portable" between spouses. Whatever portion of the personal estate-tax exemption not used by the first spouse to die can be "ported" over to the second spouse.

EXAMPLE: Lance and Buffy have an estate worth $18 million. Lance dies in 2022, leaving his half, or $9 million, to Buffy. All the property Lance leaves to Buffy is exempt from tax because of the marital deduction. So Lance's estate uses up none of his 2022 $12.06 million personal exemption. When Buffy dies in 2024, her estate is worth $18 million. None of her $18 million is subject to estate tax because her estate can combine her $13.61 million personal exemption with Lance's unused exemption, making her total exemption over $25 million.

These exemptions and deductions mean that all but the super-rich will escape estate taxes. Whether this is wise policy depends on one's views on inherited wealth.

RESOURCE

Keep tabs on changes to the estate tax. Although federal estate tax laws are currently stable, political changes in Congress could lead to changes, including reductions in the amount of the personal estate-tax exemption. You can keep up to date on this, and how such a change could affect state estate tax, at www.nolo.com/legal-encyclopedia/estate-tax.

Property You Leave to Your Spouse

As discussed above, the marital deduction allows you to leave property to your spouse free of federal estate tax. You must be legally married to qualify for the marital deduction. There are no similar exemptions for unmarried couples.

EXAMPLE: Pamela dies in 2024. She leaves $25 million to her husband, Rinaldo. No estate tax is assessed.

The marital deduction works in addition to all other allowable estate tax deductions.

EXAMPLE: Marty has an estate valued at $21 million. He leaves $10 million to his children and the rest, $11 million, to his wife. Marty dies in 2024. All Marty's property is exempt from federal estate tax—the $11 million because of the marital deduction and the remaining $10 million because it is less than the $13.61 million personal estate tax exemption for 2024.

Special Rules for Noncitizen Spouses

No marital deduction is allowed for property left by one spouse to a spouse who isn't a citizen of the United States. It doesn't matter that a noncitizen spouse was married to a U.S. citizen or is a legal resident of the United States. The surviving spouse must be a...