An Overview of Federal Estate Tax Laws

What You Should Know About Taxes When You Plan Your Estate

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The History of the Federal Estate Tax

The federal estate tax has been something of an on-again-off-again issue over the years, suffering a couple of fits and starts. It was repealed on January 1, 2010, then it was brought back retroactively to that date on December 17, 2010 when President Barack Obama signed the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act (TRUIRJCA). TRUIRJCA also set new rules for the estates of decedents who died in 2011 and 2012.

Then Congress and President Obama enacted the American Taxpayer Relief Act (ATRA) in the early days of 2013, making the estate tax, gift tax, and generation-skipping transfer tax laws permanent with one exception. The top tax rate was increased from 35 percent in 2010, 2011 and 2012 to 40 percent in 2013, where it remains as of 2019.

When it comes to federal tax issues, however, the term "permanent" can be a bit misleading. Provisions are only permanent unless and until Congress votes to change them. President Donald Trump has indicated he would consider repealing the federal estate tax yet again, and the federal estate tax exemption more than doubled under the Tax Cuts and Jobs Act (TCJA) in 2018. 

Historical Estate Tax Exemptions and Rates

Here's a visual summary of the estate tax law changes that have taken place under this legislation: 

YEAR EXEMPTION TAX RATE
2009 $3,500,000 45%
2010* $5,000,000 or $0 35% or 0%
2011 $5,000,000 35%
2012 $5,120,000 35%
2013 $5,250,000 40%
2014 $5,340,000 40%

The heirs of decedents who died in 2010 had to choose between using the $5,000,000 estate exemption and the 35-percent estate tax rate, or a $0 estate tax exemption and a zero percent estate tax rate coupled with use of the modified carryover basis rules.

The exemption amount increased to $5.43 million in 2015, then to $5.45 million in 2016 and to $5.49 million in 2017. Then there was the big jump under the terms of the TCJA, up to $11.18 million in 2018, then $11.4 million in 2019. This means that your heirs will be spared this tax if your estate isn't worth this much., your heirs will be spared the tax. Only the value of an estate over the exemption threshold is taxed at a graduating rate that tops out at 40 percent.

The Exemption Is Indexed for Inflation

The federal estate tax exemption was also permanently indexed for inflation under the terms of ATRA. This means that it will increase incrementally each year to keep pace with the economy. This annual increase might lull many into a false sense of security with regard to estate planning because they don't anticipate that their estates will reach these significant financial thresholds, but there are still quite a few other reasons to put an estate plan in place which have nothing to do with taxes.

This newfound "permanence" when it comes to estate taxes should not be used as an excuse to put off making or updating your estate plan. Planning for estate taxes is only one very small piece of the puzzle, and the beauty of an estate plan is that it can be made flexible enough to change as your life and the laws change.

Planning for State Estate Taxes

Fourteen states and the District of Columbia also collect an estate tax as of 2019. An additional six states also collect a state inheritance tax. Maryland is the only state that collects both taxes. 

In most of the states that collect estate taxes, A significant gap exists between the 2019 federal exemption of $11.4 million and the local exemption in many of the states that collect estate taxes. For example, the 2017 state estate tax exemption is only $2 million in New Jersey, and this can make planning tricky.

The wills and trusts of residents, as well as nonresidents who own real estate in these states, must take the estate tax gap between federal and state exemptions into consideration. 

NOTE: State and federal laws change frequently and the above information may not reflect the most recent changes. Please consult with an attorney or tax adviser for the most up-to-date advice. The information contained in this article is not intended as tax or legal advice and it is not a substitute for tax or legal advice.