Understanding Federal Estate Tax Laws

Many people who have an inheritance to give to loved ones want to maximize it, not hand over a significant portion to the federal government for taxes. However, if you do not carefully plan your estate, this is exactly what can happen. An experienced Arizona estate planning lawyer can explain federal estate tax laws to you and how they may impact your situation. Consider contacting Harrison Law, PLLC at (480) 320-2310 for a confidential consultation.

What Is the Federal Estate Tax Law?

The federal estate tax law is a tax imposed by the federal government on a person’s right to transfer assets to beneficiaries after their death. The Internal Revenue Service requires estates valued at more than a certain threshold to file a federal estate tax return and pay any estate tax due. The threshold is $12.06 million for the 2022 tax year and $12.92 million for 2023.

How Do Federal Estate Tax Laws Work?

The federal estate tax applies to various types of assets, including:

• Cash
• Stocks and bonds
• Real property transfers
• Business interests
• Annuities
• Trusts
• Life insurance
• Other valuable assets

The fair market values of all of the assets are added up to equal the decedent’s gross estate. The fair market value is equal to what the assets are worth at the time of the decedent’s death, not what the decedent paid for them during his or her lifetime. The Internal Revenue Service alternatively gives the executor of the estate the option to value the assets six months after the death.

Credits and allowable deductions to the estate tax are first subtracted from the gross estate to determine These may include:

• Charitable donations
• Mortgages or other debts on the property
• Costs and fees to settle the estate

Only the portion of the estate that is above the relevant threshold is subject to estate tax. For example, for tax year 2022, the threshold is $12.06 million. Therefore, if an estate was valued at $13.06 million, only $1 million would be subject to the estate tax. The estate tax rate depends on how much over the exemption limit the assets are. The estate tax rate ranges from 18% to 40%, with $10,000 subject to 18% and estates that are over $1 million above the exemption limit being subject to 40%.

Parties Subject to Estate Tax

Estates of U.S. citizens and U.S. residents that are above the exemption level at the time of their death are subject to the federal estate tax.

How to File an Estate Tax Return

The executor of the estate must file Form 706 with the Internal Revenue Service if estate tax is due. The deadline to submit the estate tax return is nine months from the date of death. Interest will accrue for any tax amounts owed on the estate that are not paid when they are due.

Estate Tax and Gift Tax

The 2010 Tax Relief Act connected the federal estate and gift tax. Therefore, when calculating the value of an estate, previous lifetime gifts are considered. Estates with combined gross assets and prior taxable gifts that exceed the exemption limit are subject to the federal estate tax. This rule prevents large estates from making lifetime gifts to avoid the federal estate tax.

Estate Tax and Inheritance Tax

Some people confuse the estate tax with an inheritance tax. However, these are two different types of taxes. The estate tax is a federal tax that is based on the value of the decedent’s estate at the time of their death after relevant deductions and credits are made to the estate. The estate itself is responsible for paying this tax.

The inheritance tax is not a federal tax. Some states do charge it. If an inheritance tax applies, the beneficiary who receives the inheritance is responsible for paying any relevant inheritance tax. However, the tax is owed only on the value of the inherited assets, not on the entire estate like it is on the estate tax.

The Unlimited Marital Deduction and Estate Tax Portability

One important deduction that many people can take is the unlimited marital deduction. This allows a spouse to pass on their property to their spouse to avoid the federal estate tax. Estate tax is assessed on the estate’s value after all available deductions, which include the marital deduction. This deduction allows the estate to receive a deduction for all property in the gross estate that transfers to the surviving spouse at the time of the decedent’s death.

Additionally, estate tax portability allows a married person to pass any of their unused exemption to their surviving spouse for their own estate. For example, if a spouse died in 2022 and their estate was worth $10 million, the decedent would still have $2.06 million in exemption based on the 2022 exemption limit. The decedent could pass on this $2.06 million to their surviving spouse so that when the spouse dies, they could have an estate valued at up to the exemption limit, plus the $2.06 million, without owing any federal estate taxes. A federal estate tax return must be filed to claim the estate tax portability.

How to Reduce Estate Taxes

One way to reduce or even avoid federal estate taxes is to decrease the value of your estate under the federal exemption limit. Some options may include:

• Giving away assets during your lifetime
• Making charitable donations
• Transferring assets to trusts
• Transferring your life insurance policy
• Setting up an irrevocable life insurance trust or intentionally defective trust to isolate certain assets from your gross estate

The more valuable your estate, the more detailed your estate plan would need to be to avoid federal estate taxes. An experienced lawyer from Harrison Law, PLLC can discuss your particular situation and help determine which strategies can be put in place to minimize your tax burden.

Contact an Estate Planning Lawyer for Help

Federal estate tax laws can be confusing, but an experienced Arizona estate planning lawyer can help. Consider contacting Harrison Law, PLLC at (480) 320-2310 for a confidential consultation to discuss your unique situation.

© 2023 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.