Although it may sound ominous, the so-called “death tax” is not as unsettling as it might seem.
The Tax Cuts and Jobs Act currently making its way through Congress includes a phase-out of the death tax over several years, however, let’s discuss what this income tax is in its current form.
The death tax, in simple terms, is an income tax levied on the total asset value of an individual’s total estate value upon death. Presently, there are some very high exemption amounts whereby amounts below the exemption are NOT subject to the estate tax.
In addition to federal estate taxes, several states collect what some accountants call a “death tax,” based on the overall value of the estate of the deceased or on the value of the individual inheritances.
- When derived from the value of the estate, the first instance of this “death tax” can be viewed as falling under the larger umbrella of “estate tax” and is often referred to as such.
- The latter version, derived from the value of the individual inheritances, is technically an inheritance tax, rather than an estate tax.
Who Pays These Taxes?
While beneficiaries are responsible for paying such taxes on their own bequests, it is not unusual for such a tax to be paid by estates’ executors on behalf of their beneficiaries.
Regardless of who inherits the assets, estate taxes are always charged against the estate, but the rules are a bit different for inheritance taxes: depending on the relationship of the inheritor to the deceased, the exemptions may differ. For instance, in some states, spouses, siblings, and children often have different exemptions.
Where Are Inheritance / Estate Taxes Collected?
Six states have an inheritance tax, while fifteen others, in addition to the District of Columbia, have an estate tax. Two states, Maryland and New Jersey, actually have both an inheritance and an estate tax. In recent years, however, repeal and reform of estate and inheritance taxes have been relatively frequent, with numerous states in the process of phasing in higher exemptions. It has been posited that estate and inheritance taxes may actually inhibit entrepreneurship and can be harmful to economic growth in the long run, so it’s no wonder that states have been working to reform their death tax-related laws.
Currently, in the state of California, there is no state estate tax imposed in addition to the standard federal estate tax. The exemption from the federal estate tax is $5.49 million for an individual or $10.98 million for a couple, after which a 40% estate tax is levied. This tax rate is indexed to inflation. Subject to the estate tax are all of the decedent’s assets, including cash, property in joint tenancy, IRAs, living trusts, and life insurance (if controlled or owned by the deceased).
The state of California did have an inheritance tax until 1981, but this was voted out in a statewide election. And, prior to 2005, the state of California imposed a so-called “pick-up tax” based on the state estate tax credit allowed by the IRS on the federal tax return. Currently, there are no state taxes on inheritance or gifts.
The best way to assure that your loved ones and employees are secure after you pass is to have an estate plan prepared by a lawyer who specializes in this area and to meet with your CPA/Tax advisor.
You can’t avoid death, but you can minimize death taxes if you prepare. Contact the tax experts at Sousa & Weber to discuss your situation and for referrals to highly respected estate attorneys.