Estate Taxes – An Introduction

Estate taxes, sometimes called “death taxes,” are wealth taxes imposed by Congress and state legislatures on the property owned by a deceased person at the time of his death. There is a federal estate tax, and many states levy their own estate taxes.

For Virginians who died prior to July 1, 2007, Virginia’s state estate taxes began at about 8 percent on estates over $2 million, and rose to about 16 percent for estates over $10 million. Thankfully, the Virginia estate tax was repealed. However, 18 states, plus the District of Columbia, still levy their own estate or inheritance taxes.

But federal estate taxes are still with us. The federal estate tax was in fact phased out temporarily under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTERRA”), and was zero for people who died in 2010. But thanks to legislation passed in the waning hours of December 2010, the death tax sprang back to life in 2011.

Today’s Death Tax Landscape

The taxman's hand

Death taxes are extra taxes levied on property that has already been taxed at least once.

Technically, all estates are liable for estate tax, but each taxpayer currently has a cumulative, lifetime federal estate & gift tax exclusion (for persons dying in 2017) of about $5.49 million. (It was $5,450,000 for 2016 estates, to be exact, and will be $5,490,000 for 2017 estates unless transfer tax reforms are enacted before year’s end.) The practical result is that there usually will be no estate tax payable at the time of death if a Virginia resident who has not made large gifts during his lifetime dies in 2017 and leaves less than $5.49 million worth of property in his estate. But despite Congress’s talk of “permanent fixes,” no one can ever be quite sure what future rates and exclusions will be.

The $5-1/2 million exclusion sounds like a huge amount to most young families. But in fact, many Northern Virginia homeowners with IRAs, 401(k), or TSP retirement plans, a moderate amount of home equity, and reasonable amounts of life insurance and personal savings and investments already have per-person “estate net worth” figures in the $2 million-and-up range. This means that, with normal-to-robust investment growth, unless they take action to reduce their estate taxes, every dollar that moderately-well-off Virginia couples plan to leave to their children above the exclusion amount applicable at their deaths will be taxed at federal rates. And those rates currently start at 40 percent, with even higher effective rates for many retirement account distributions (because they are also subject to income taxes and various health care law surcharges, as well as estate taxes). An executor has nine months (to the day) from the date of a person’s death to pay his or her estate tax bill.

Surviving Spouses (Usually) Pay Death Taxes Later; Charities Never Pay Them

No federal estate tax is imposed on any property left outright, or in certain types of trusts, to a surviving wife or husband who is a U.S. citizen. Nor is there an estate tax on property left to a qualified charity. Married people who are U.S. citizens therefore may leave up to $5.49 million to their children and the balance of their estates to a surviving spouse (or charity). If done property, that completely avoids any estate taxes at the time of the first death. But all property left to that surviving spouse will be subject to death taxes at the time of the survivor’s death (unless it is left by him or her to charity, or to a new surviving spouse).

Your Estate Might Be Larger Than You Think

Estate taxes are computed based upon the total value of all property (including the death benefits and cash value of life insurance policies owned or controlled by the deceased person) transferred because of the deceased person’s death (excluding property left to a surviving spouse or to charity). The full value of an estate for estate tax purposes usually will be substantially larger than the value of the “probate estate,” which usually does not include life insurance benefits, retirement accounts, tenants-by-the-entirety or survivorship accounts and real estate, or property held in revocable living trusts.

Plus, there’s another tax that can seriously deplete your estate – the federal Generation-Skipping Transfer Tax, or “GST Tax.” Read on

“The taxpayer: Someone who works for the government but doesn’t have to take a civil service examination.” –Ronald Reagan