What is estate tax?
Estate tax is a tax on the right to transfer property when you die. The federal estate tax generally applies when a person’s assets exceed a certain amount — $11.4 million in 2019 — at the time of death. When Uncle Sam collects the estate tax, the tax rate can be up to 40% of any dollars above the current exclusion figure, which is typically adjusted each year for inflation and doubled for married couples. Property that passes outright to a surviving spouse generally isn’t subject to estate tax.
IRS Form 706 has the details on exactly which assets count in the calculations, how to find their value, and how to figure the tax.
A handful of states also impose estate taxes at various income thresholds.
How to reduce estate taxes
If you want to reduce your estate taxes before you die, there are some tactics you might use to protect your property. They include:
- Spending your assets. If you’re not afraid of running out of money before you die, enjoy your wealth.
- Spreading your assets. You could give away part of your estate as gifts to loved ones while you’re still around. Many states don’t tax gifts. (Learn how the gift tax works.)
- Giving away your assets. If you leave property to a qualifying charity, it is deductible from the gross estate.
- Shielding your assets in a trust. Properly created irrevocable or bypass trusts could provide a way to legally shelter some of your assets from state and federal estate tax.
- Moving to a more favorable tax environment. Since most states don’t have estate tax or inheritance tax, you have many relocation options.
- For more on transferring your assets wisely, see our estate planning checklist.
Which states also have an estate tax?
- For 2019, 13 states and the District of Columbia have an estate tax. Many have lower estate tax thresholds than the federal government. Each state’s exclusion amount is in the table below.
|District of Columbia||$5.682 million|
|New York||$5.74 million|
|Rhode Island||$1.562 million|
- If you live in one of the states with an estate tax, the good news is that (generally speaking) your estate tax payments are subtracted from the value of your taxable estate before you calculate what you might owe the U.S. Treasury.
The difference between estate tax and inheritance tax
A few states impose inheritance taxes, which are different from estate taxes in that they are paid by heirs rather than by the deceased’s estate.
- Six states have an inheritance tax in 2019, and one collects both estate and inheritance taxes.
- Inheritance tax rates often depend on the heir’s relationship to the deceased. A surviving spouse is exempt from inheritance tax in all states. Some states tax a deceased person’s children, but at a low rate. More distant relatives or heirs who aren’t related to the deceased usually face the highest inheritance tax rates.
Watch out for capital gains tax
- Even if an inheritance isn’t taxed when your heirs receive it, any subsequent earnings or income that it produces may be considered taxable capital gains at the federal and state levels.
- If your heirs sell an asset they inherited, any profit could be taxed at the federal level as either a long-term or short-term capital gain, depending on when they dispose of the property.
- If you do give your heirs a bequest, especially a sizable one, it’s a good idea for them to talk with an attorney who specializes in estate tax matters about the best ways to minimize any potential state tax bite.