When Does the Estate Tax Kick In?

The inflation-adjusted federal estate tax exemption for decedents dying in 2019 is $11.4 million per person (up from $11.18 million in 2018). This means that if your taxable estate’s assets are worth less than $11.4 million, no tax will be due.  If you are married, your spouse gets a separate $11.4 million exemption without owing federal estate tax. Tax is imposed, regardless of how you disperse your property or the relationship you have to the beneficiaries (except your spouse). The federal estate tax is 40% on assets above $11.4 million.

The above federal estate tax limits will revert back in 2026 to 2017 levels; the figure is adjusted annually for cost of living increases.

State tax liability

The estate tax exemption at the state level may differ from the federal estate tax exemption.  Some states follow federal law; others decouple from their federal counterpart.   Even if you do not owe any federal estate tax, you may incur a state estate or inheritance tax liability.

There are 12 states plus District of Columbia that impose an estate tax:  Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode island, Vermont, and Washington.

There is also a few states that impose an inheritance tax on the heir(s) of the assets of the deceased, with rates varying based on the relationship with the deceased: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Our recommendation is to review your estate tax planning documents for any changes in your circumstances and how these changes in the federal estate exemptions affect your estate plan.

Case Studies: Estate Tax Planning

Case Study 1: The Smith Family

The Smith family’s taxable estate’s assets are worth $9.5 million. They want to understand if they will owe any federal estate tax and if their state imposes an estate or inheritance tax. By reviewing their estate tax planning documents, they discover that they are below the federal estate tax exemption limit of $11.4 million. Therefore, no federal estate tax is due for the Smith family.

Case Study 2: The Johnsons and the Federal Exemption Reversion

The Johnsons have an estate valued at $15 million. They are aware that the federal estate tax exemption will revert back to 2017 levels in 2026. By understanding the impact of this change, they can adjust their estate plan accordingly. They consult an estate planning attorney to determine the potential federal estate tax liability their estate may face in the future.

Case Study 3: The Brown Family and State Estate Taxes

The Brown family resides in Connecticut, a state that imposes an estate tax. They want to estimate their potential state estate tax liability. Their estate is valued at $13 million, exceeding the federal estate tax exemption but falling within the state’s estate tax threshold. They seek legal advice to understand their obligations and explore strategies to minimize their estate tax burden.