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 mid-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 Thankfully, that Virginia estate tax was repealed.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 2018) of about $11.2 million. (It was $5,490,000 for 2017 estates – that is, people who died before midnight on December 31, 2017.) 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 2018 and leaves less than $11.2 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 $11.2 million exclusion sounds like a huge amount to most young families. But in fact, under the 2017 Tax Cuts and Jobs Act, that exclusion is scheduled to snap back to $5.49 million in 2026. (Congress could act to change that, but there’s no predicting who will control Congress in the 2020s, nor what changes Congress might choose to make.)

Therefore, it’s worth keeping in mind that the 2017 tax act crippled the Death Tax, but didn’t kill it. And 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, every dollar that moderately-well-off Virginia couples plan to leave to their children above the exclusion amount applicable at their deaths could still be taxed at federal rates if Congress decides to go in a different direction in, or before, 2026. 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).

And as a result, it continues to be my practice to include death-tax minimizing provisions in most multigenerational trusts that I draft for my clients. Because I don’t want any client of mine to risk having the federal death tax snap back on January 1, 2026 (or sooner than that, or later, depending on the whims of Congress) and then keel over on January 2, leaving his estate with a whopping tax bill. The “extra cost” for such planning? Usually nothing, except a few pennies worth of paper and toner and a slightly longer trust document.

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 $11.2 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). An executor has nine months (to the day) from the date of a person’s death to pay his or her estate tax bill.

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