Understanding Estate & Inheritance Taxes

What Is the Federal Estate Tax?

The federal estate tax is a tax on the transfer of property at death. It applies only to estates exceeding the exemption threshold, which is $13.61 million per individual for 2024 (adjusted annually for inflation). For married couples, portability allows combining exemptions to $27.22 million.

Importantly, the tax is paid by the estate before assets are distributed to heirs – beneficiaries generally do not owe federal income tax on inherited assets (though capital gains rules may apply later).

State Estate vs. Inheritance Taxes

Twelve states + DC impose their own estate taxes, with exemptions often much lower than federal levels:

• Massachusetts: $1 million exemption
• New York: ~$6.94 million (2024)
• Oregon: $1 million exemption
• Washington: ~$2.2 million (2024)

Six states impose inheritance taxes (tax on the beneficiary), with rates and exemptions varying by relationship to the deceased. Spouses are typically exempt; distant relatives pay higher rates.

Key Deductions That Reduce Taxable Estate

• Marital Deduction: Unlimited deduction for assets passing to a U.S. citizen spouse
• Charitable Deduction: 100% deduction for qualified charitable bequests
• Debts & Expenses: Funeral costs, administrative fees, mortgages, and other debts
• State Death Taxes: Deductible on federal return (limited)

Estate Planning Strategies to Reduce Taxes

✅ Lifetime Gifting: Use the annual exclusion ($18,000 per recipient in 2024) to transfer wealth tax-free. Married couples can combine for $36,000 per recipient.

✅ Irrevocable Life Insurance Trusts (ILITs): Remove life insurance proceeds from your taxable estate while providing liquidity for heirs.

✅ Grantor Retained Annuity Trusts (GRATs): Transfer appreciating assets to heirs with minimal gift tax consequences.

✅ Family Limited Partnerships (FLPs): Consolidate family assets while applying valuation discounts for lack of marketability/control.

✅ Charitable Remainder Trusts: Receive income during life, with remainder going to charity – generating income tax deductions and reducing estate size.

Important Considerations

Step-Up in Basis: Heirs receive a "step-up" in cost basis to the asset's value at death, potentially eliminating capital gains tax on appreciation during the decedent's life. This valuable benefit may change with future legislation.

Portability: Surviving spouses can elect to use any unused exemption from the first spouse to die (DSUE). This requires filing Form 706 even if no tax is due.

When to Consult a Professional

Estate planning involves complex legal, tax, and family dynamics. Consult qualified professionals if:

• Your estate exceeds $5 million (or your state's exemption)
• You own a business or complex investments
• You have blended family considerations
• You want to minimize taxes while supporting charitable goals
• You need help with trusts, powers of attorney, or healthcare directives