What Is Estate Tax

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Estate Taxes: A Simple Explanation

Estate taxes, often referred to as “death taxes,” are taxes levied on an individual’s estate after they pass away. The tax is applied to the total value of a deceased person’s money and property and is paid out before the inheritance is distributed to the heirs.

What Is An Estate Tax?

How Estate Taxes Work

  1. Valuation of Estate: The first step is to calculate the total value of the deceased’s estate, including cash, investments, real estate, and other assets.
  2. Deductions and Exemptions: Certain deductions (like debts and funeral expenses) and exemptions are applied. For instance, in the United States, estates below a certain threshold value are exempt from federal estate taxes.
  3. Tax Rate: If the estate exceeds the exemption limit, the remaining value is subject to estate tax at a rate that varies based on the estate’s value.

Key Points About Estate Taxes

  • Not Applicable to All Estates: Many estates fall below the exemption threshold and are not subject to estate taxes.
  • Varies by Location: Estate tax laws and rates vary by country and, in some countries, by region or state.
  • Impact on Inheritance: Estate taxes can significantly impact the amount inherited by beneficiaries.

Related Reading: Estate planning for unmarried couples

Estate Tax Rate

Estate Tax vs. Inheritance Tax

It’s important to differentiate between estate and inheritance taxes. Estate taxes are charged against the estate itself, while inheritance taxes (where applicable) are levied on the individuals receiving the inheritance.

Example

Imagine an estate worth $3 million. If the exemption limit is $2 million, only the remaining $1 million is subject to estate tax. The exact tax rate would depend on the applicable laws.

Conclusion

Understanding estate taxes is crucial for estate planning and ensuring your beneficiaries receive their intended inheritance. These taxes can have a significant impact on the value of the estate passed on. Contact us today for a free quote.

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Frequently Asked Questions

What is the tax rate for the estate tax?

The 2023 federal estate tax rate is 40% on a value above $12.92 million.

How do you calculate estate tax?

Calculate the estate’s gross value, subtract deductions and exemptions, and then apply the 2023 federal estate tax rate of 40% on the remaining value over $12,920,000.

Does the US still have an estate tax?

The US still has an estate tax in 2023, with a $12.92 million exemption per individual.

What is the difference between an estate tax and a gift tax?

The estate tax is a tax on the transfer of property after death, while the gift tax is a tax on the transfer of property during one’s lifetime.

How much money can you gift to a family member without paying taxes?

In 2023, the annual exclusion limit for gift tax is $17,000 per recipient per year.

Do beneficiaries pay tax on gifts?

No, beneficiaries do not pay tax on gifts. The gift tax is typically paid by the person making the gift (i.e., the donor).

Is it better to gift or inherit property?

It depends on individual circumstances, such as tax implications, timing, and personal preferences.

What is the purpose of estate and gift taxes?

The purpose of estate and gift taxes is to generate revenue for the government and prevent the concentration of wealth in the hands of a few individuals or families.

How does the IRS know if you give a gift?

The IRS may know if you give a gift if you report it on your tax return or if the gift exceeds the annual exclusion limit and you file a gift tax return. Additionally, sure gifts may be subject to disclosure rules or trigger other reporting requirements.

What is the IRS estate tax?

The IRS estate tax is a federal tax on the transfer of an individual’s property at death. The tax is calculated based on the estate’s value and is paid by the estate before assets are distributed to beneficiaries.

*Disclosure: Some of the links in this guide may be affiliate links. I may receive a commission at no cost to you if you purchase a policy. It helps us keep the lights on!

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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