In the United States, most estates avoid taxation. To have a levy placed on yours requires you to have substantial assets. Yet, years of shrewd saving might have led you to amass a sizable fortune. Or, a business success might have led to a financial windfall that increased your estate’s value. In these cases, among others, understanding the estate tax’s impact can help you take steps to safeguard your assets.
Federal estate taxes
In the United States, 99.8% of estates avoid paying federal estate taxes. The small number that are taxed, though, can lose up to 40% of their value. Yet, so long as your estate is worth $11.58 million or less, it qualifies for the federal estate tax exemption. If you are married, this amount increases to $23.16 million.
Keep in mind that the federal exemption will decrease in the next few years. The Tax Cuts and Jobs Act of 2017 more than doubled it – starting in 2018 – from that year’s levels, which were $5.49 million for individual estates and $10.98 million for marital estates. Yet, this act expires at the end of 2025. Starting in 2026, the federal exemption will revert to its 2017 levels, adjusted for inflation.
State estate and inheritance taxes
Even if your estate is exempt from federal taxation, you may worry that California could place a levy on it. Or, you may fear your estate is large enough that your beneficiaries could pay inheritance taxes once its contents disburse. State estate taxes are imposed in 12 states, as well as the District of Columbia. Six states impose inheritance taxes as well. Both taxes can affect estates that qualify for the federal exemption. Yet, yours will avoid them, since California imposes neither.
If your estate could be taxed now or in the future, you must take steps to protect its value. An attorney can help you understand your options for reducing your estate’s tax burden.