Who Pays Estate or “Death” Tax?
Don’t be afraid! One of the first questions we get asked when discussing estates and probates is, “Will my loved ones pay ‘death’ or inheritance tax after I die?”
The short answer. Probably not.
The estate tax—a.k.a. the “death” tax to those who want it repealed—is a federal tax on assets (including cash and securities, real estate, insurance, trusts, annuities, business interests and other assets) upon one’s death.
In 2017, anyone who died leaving an estate larger than $5.49 million paid 40 cents on the dollar for every dollar over $5.49 million. As you can imagine, this is an unpleasant conversation to have with people.
After the new tax plan passed in 2018, the estate tax exempt amount jumped to $11.2 million per person.
Unlimited amounts pass between spouses. The $11.2 million amount applies to beneficiaries like children or grandchildren.
According to a 2015 report from Congress’s Joint Committee on Taxation, 4,700 estate tax returns reporting tax liability were filed in 2013, out of 2.6 million deaths in the United States. That’s around 0.2 percent of Americans, or roughly two out of every 1,000 people who die.
And once the tax bill passed, the studies estimate that around 1,800 estates will be affected this year.
Estates Often Pay Less Than 17% in Taxes — Not Top Rate of 40%
The top statutory rate is 40 percent, however the effective tax rate— or what the estates actually paid—was less than 17 percent in 2017, according to the Tax Policy Center.
If the tax rate is 40 percent, how is it estates pay less than 17%? Here are reasons:
- Remember, estates only owe taxes on the amount above the exempted amount, which, again, is $11.2 million in 2018.
- There are plenty of deductions and loopholes thrifty accountants and lawyers can use.
- GRATs (grantor retained annuity trust) – a type of trust created to transfer assets tax-free. We recently implemented a plan involving a GRAT for a client. The estate owner put money into a trust designed to repay the estate the initial amount, plus interest at a rate set by the Treasury, typically over two years. If the investment — typically stock — rises in value any more than the Treasury rate, the gain goes to an heir tax-free. If the investment doesn’t rise in value, the full amount still goes back to the estate.
State Inheritance Tax – Texas Doesn’t Have It
Some states have state inheritance taxes. Luckily, Texas has no such tax. Below is a handy guide to your state’s inheritance tax.
Inherited Retirement Account Taxes – Some Apply
If you inherit a 401(k) or IRA, you may be taxed on any distributions and you may pay the capital gains tax on the gains if you inherit stocks or real estate and sell them.
Gift Taxes – Give Away $15,000 Tax-free To You
Finally, individuals are allowed to give away $15,000 per year (in cash, stocks, cars, etc.) without being taxed, and that’s $15,000 per donee. So if you have three kids, you can gift each of them $15,000 per year, for a total of $45,000. If you give more than that amount, you will need to file a gift tax return so you aren’t taxed on the excess amount.
Again, if you’re gifted stocks, know that you’ll pay taxes on the gains should you sell them.
Tax Attorney Could Help Cut Taxes On A Large Estate
If you’re likely to inherit (or give away) a sizable estate, you should meet with a tax attorney to figure out how everything will go down in your state.
You can afford it, after all.
Come see the Weaver Firm Attorneys today to discuss estate taxation issues and planning techniques.