Fifteen Facts You Should Know About the Federal Estate Tax

What is the federal estate tax? Estate planning is a vital aspect of financial management, especially when it comes to the Federal Estate Tax in the United States. This tax, often misunderstood, can significantly impact the transfer of wealth from one generation to the next. In this comprehensive guide, we'll explore fifteen essential facts about the Federal Estate Tax to help you gain a better understanding of its implications and how to effectively plan your estate to minimize its impact.

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What is the Federal Estate Tax?

Federal Estate Tax is a tax imposed on the transfer of an expired person's person's estate to their heirs and beneficiaries. It applies to estates with a certain value, and the tax rate can vary depending on the total estate value at the time of death.

In the event of your demise, in case your estate holds a significant value, estate taxes may apply to the assets you intend to pass on as inheritances. These assets could encompass various items, such as retirement accounts, real estate, cash, and other valuable possessions.

Is estate tax federal or tax? An estate tax is federal.

Estate Tax Vs Inheritance Taxes

Aspect	Estate Tax	Inheritance Tax
Definition	Tax imposed on the estate of an expired individual, based on the estate's total value at the time of death	Tax levied on beneficiaries who inherit assets or property from a deceased person. The tax is based on the value of the inheritance received by each beneficiary.
Applicable at the	Federal Level and some state levels	Some state levels
Threshold	$12.92 M (individual) in 2023. For couples who are married, the threshold is $25.84M. Thresholds vary among states	Varies by state; some states have no inheritance tax.
Tax Rate	Graduated rate up to 40 percent for amounts taxable exceeding $1 million at the federal level.	Varies by state; the tax rate typically depends on the relationship between the deceased and the beneficiary. Spouses and close relatives may receive exemptions or lower rates.

15 Facts About the Federal Estate Tax

1. Exemption Threshold

What is the federal estate tax exemption for 2023 or the federal estate tax limit?

The federal estate tax exemption 2023 or 2023 federal estate tax exemption for individual estates will face the federal estate tax only if their value exceeds $12.92 M. The federal estate tax exemption for couples who are married is an impressive $25.84M. This means in case your estate's value is below this threshold, it is not subject to the tax.

But what is the federal estate tax rate?

2. Tax Rate

In 2023, the federal estate tax rules can be summarized as follows: If an individual passes away with an estate valued at $12.92M or below, they are exempted. But, for estates surpassing this threshold, only the amount exceeding $12.92M is subject to taxation. The tax rate includes base tax and marginal rate.

How much is federal estate tax? Or what are the current federal estate tax rates? Presently, the maximum federal estate tax rate is 40 percent for amounts taxable exceeding $1 million.

Let us see the various federal estate tax rates 2023.

Amount Taxable	Rate of Estate Tax	To Be Paid by You
$1 to $10,000	18 percent	– base tax: $0 – 18 percent on the amount taxable
$10,001 to $20,000	20 percent	– base tax: $1,800 – 20 percent on the amount taxable
$20,001 to $40,000	22 percent	– base tax: $3,800 – 22 percent on the amount taxable
$40,001 to $60,000	24 percent	– base tax: $8,200 – 24 percent on the amount taxable
$60,001 to $80,000	26 percent	– base tax: $13,000 – 26 percent on the amount taxable
$80,001 to $100,000	28 percent	– base tax: $18,200 – 28 percent on the amount taxable
$100,001 to $150,000	30 percent	– base tax: $23,800 – 30 percent on the amount taxable
$150,001 to $250,000	32 percent	– base tax: $38,800 – 32 percent on the amount taxable
$250,001 to $500,000	34 percent	– base tax: $70,800 – 34 percent on the amount taxable
$500,001 to $750,000	37 percent	–base tax: $155,800 – 37 percent on the amount taxable
$750,001 to $1M	39 percent	– base tax: $248,300 – 39 percent on the amount taxable
More than $1M	40 percent	– base tax: $345,800 – 40 percent on the amount taxable

Suppose your estate's value in 2023 amounts to $13.36M. In this scenario, only the excess over the $12.92M federal estate tax threshold or 2023 federal estate tax exemption amount, which is exactly $440,000, becomes your taxable estate. Based on the corresponding tax tier, you will owe a $70,800 base rate along with an extra $64,600 (34% of $190,000). Consequently, the total payable estate tax would amount to $135,400.

3. Marital Deduction

One of the essential provisions of the Federal Estate Tax is the Federal Estate Tax Marital Deduction. It allows for unlimited tax-free transfers between spouses, meaning that assets left to a surviving spouse are generally exempt from the estate tax.

4. Federal Estate Tax Exemption Portability

Federal Estate Tax Exemption Portability is a valuable feature for couples who are married. It allows the surviving spouse to carry over the unused portion of the deceased spouse's exemption. This can effectively double the exemption amount for the surviving spouse's estate.

5. Federal Estate Gift Tax Annual Exclusion

In addition to the Federal Estate Tax, there is also a Gift Tax Annual Exclusion. The gift tax annual exclusion allows you to give a certain amount each year to any number of individuals or specific types of trusts without incurring any gift tax or utilizing your gift and estate tax exemption. As of 2023, individuals can gift up to $17,000 per person each year without incurring a gift tax. While for couples who are married, it is $34,000. This allows for tax-efficient wealth transfer during one's lifetime.

6. Gift and Estate Tax Unified Credit

The Gift and Estate Tax Unified Credit allows individuals to offset their taxable estate by the cumulative lifetime gifts they've made, thus reducing or eliminating their estate tax liability.

In 2023, the lifetime gift and estate exemptions were raised to $12.92M for individuals and $25.84M for couples who are married. Consequently, if an individual's estate amounts to $15 million, only $2.08 million of that value would get subjected to federal tax.

7. Irrevocable Life Insurance Trust (ILIT)

An Irrevocable Life Insurance Trust (ILIT) is a strategic estate planning tool to exclude life insurance proceeds from the estate tax calculation. By creating an ILIT, the policy's death benefit is held outside the estate and is, therefore, not subject to estate tax.

8. State Estate Taxes

While the Federal Estate Tax applies to estates exceeding the exemption threshold, some states also levy their own estate taxes. These state estate taxes can have lower exemption thresholds, so it's crucial to be aware of the rules in your state of residence. If you pass away as the resident of specific regions in the US, your estate might get subjected to state estate taxes in addition to the federal estate tax. Per federal estate tax 2023, states such as the District of Columbia, Hawaii, Maine, Massachusetts, Rhode Island, New York, Connecticut, Vermont, Maryland, Illinois, Minnesota, Oregon, and Washington impose estate taxes. The state estate tax thresholds differ, ranging from $1M in Massachusetts and Oregon to $9.1M in Connecticut. It is crucial to see your state's official website to understand the applicable rates and potential tax liability.

9. Estate Tax Planning

Engaging in estate tax planning early can help minimize the impact of the Federal Estate Tax on your estate. Effective planning may involve gifting strategies, creating trusts, and other tax-efficient methods to preserve your wealth.

10. Family Limited Partnership (FLP)

A Family Limited Partnership (FLP) is a legal structure that allows families to pool their assets into a single partnership. This approach can offer estate tax benefits, as it reduces the taxable value of the assets.

11. Charitable Giving

Charitable giving can be an effective way to reduce estate tax liability. By leaving assets to qualified charitable organizations, you can benefit from charitable deductions that lower the taxable estate.

12. Generation-Skipping Transfer Tax (GSTT)

The Generation-Skipping Transfer Tax (GSTT) is an additional tax applied when assets are transferred to beneficiaries who are more than one generation younger than the donor. Understanding and planning for this tax is crucial for multi-generational wealth transfers.

13. Valuation Discounts

When valuing certain assets, such as closely-held businesses, discounts for lack of marketability and lack of control may apply. Properly using these discounts can reduce the taxable value of these assets for estate tax purposes.

14. Estate Tax Deduction

The IRS employs this method to avoid double taxation in specific scenarios. Even after an individual's passing, their estate can generate income, like proceeds from a pending property sale, known as Income in Respect of Decedent (IRD). When a considerable estate is at risk of double taxation, both through regular estate tax and income tax on IRD at the federal level, the estate tax deduction becomes vital. It enables taxpayers to deduct the portion of estate tax paid for IRD from the income tax associated with that specific income. This mechanism guarantees that the same assets do not face taxation twice, ensuring a fair and equitable taxation approach.

15. Avoidable Estate Tax on Insurance

Avoiding estate tax on life insurance is possible with careful planning. A common mistake people make is purchasing a life insurance policy and designating themselves as the owner. By doing so, the insurance proceeds become part of their estate, potentially exceeding the exemption amount and subjecting the funds to estate tax if left to anyone other than their spouse or a charity. To prevent this, consider alternative ownership structures for the life insurance policy.

Bottom Line

Understanding the Federal Estate Tax and incorporating strategic estate planning can significantly impact the financial well-being of your heirs and beneficiaries. With the right knowledge and expert guidance, you can navigate the complexities of estate taxes, preserve your wealth, and secure a more prosperous future for your loved ones. Remember to stay informed and regularly review your estate plan to ensure it aligns with current tax laws and regulations.

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FAQs

Q1. What is the federal estate tax?

A. The Federal Estate Tax is a tax imposed on the transfer of an expired person's estate to their heirs and beneficiaries. It applies to estates with a certain value, and the tax rate can vary depending on the total estate value at the time of death.

‍Q2. How much is federal estate tax?

A. In 2023, the federal estate tax applies to assets valued over $12.92M, with tax rates varying from 18% to 40%.

Q3. What is the federal estate tax exemption for 2023?

A. In 2023, individual estates will face the federal estate tax only if their value exceeds $12.92M. For couples who are married, the threshold is even more advantageous, as it doubles to an impressive $25.84M. This means in case your estate's value is below this threshold, it is not subject to the tax.

Q4. Is estate tax federal or tax?

A. Estate tax is federal.