As an estate planning attorney, I often have clients ask whether their estate will be subject to taxation at the time of death. Answering this question is something that involves numerous considerations and therefore a person should seek specific legal and financial advice based on their circumstances. However, there are some basic principles of which you should be aware that will help on this subject.
The main consideration is the size of the person’s estate. Federal tax law provides what is referred to as the “Unified Credit.” This is a tax credit that is afforded to every U.S. citizen. This credit allows each person to gift or devise a certain amount of their assets to other parties without having to pay gift or estate tax.
In 2016, the Unified Credit amounts to $5.45 million per person–this is comprised of a credit amount of $5 million plus certain annual adjustments. In 2017, the IRS has indicated that the Unified Credit will total $5.49 million. Unless Congress changes the tax law, the Unified Credit will continue to have annual inflation adjustments.
Some examples using the current Unified Credit amounts may help. First consider John, a single U.S citizen with a net worth of $4.3 million, who dies in 2016 while a resident of Florida. Because his gross taxable estate (which includes essentially everything he owns) is less than $5.45 million, there will be no Federal estate tax. Since John is a Florida resident, there is also no state estate tax. However, if you take the same facts except John has an estate of $5.9 million, then there will be an estate tax imposed on the $450,000 (less deductions) which exceeds the exemption amount of $5.45 million.
If we add another twist to the above example–i.e. that John is married to Nancy–then the analysis changes somewhat. In that instance, both John and Nancy are entitled to the Unified Credit. So theoretically they can protect a total estate of $10.9 million in 2016. However, because there is also an Unlimited Marital Deduction, the amount John or Nancy could leave to the other spouse is unlimited. So if John died and his net worth was $20 million, he could leave all of it to Nancy free of estate tax. However, when Nancy dies, if she is single, the Unified Credit (both Jon’s and hers) will apply to her estate but not the Unlimited Marital Deduction.
In analyzing these estate tax issues, there are some complicating factors. First, the discussion above applies to Federal estate tax–however, some states have their own estate taxes and the consideration there may be different. In addition, the estate tax analysis is completely different if a person, or a spouse, or both, are not U.S. citizens.
As stated above, because of the complexity of estate tax analysis, a person should consult an estate planning expert.