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Estate Tax Law FAQs
Will my beneficiaries’ inheritance be taxed?
Current federal laws require U.S. citizens and residents to pay three types of taxes on a transfer of property: estate tax, generation-skipping transfer tax, and gift tax. States can also impose taxes on the transfer of estate property.
What is an estate tax?
An estate tax is a tax on your right to transfer property at the time of your death. The IRS and state agencies that collect an estate tax at all (some states do not) have an exemption that excludes all but the largest estates from paying this tax.
The first step to calculating your estate tax is to determine your “gross estate.” This typically includes every asset and interest that a person owns or has an interest in at the time of his or her death. There are many other calculations and additions that are conducted when determining an individual’s gross estate. For example, the value of any property that the decedent had, at any time, transferred during the three years prior to his or her death is added to the decedent’s gross estate, even if he or she no longer owns the property at the time of death.
After calculating the gross estate, federal law allows for certain deductions to be made on the “taxable estate.” These deductions include, but are not limited to, funeral expenses, claims against the estate, administration expenses, some contributions to charitable organizations, and certain bequests made to surviving spouses. Calculating the amount of inheritance tax owed also requires determining the tax base that applies to the estate, which can be found in a publication released annually by the IRS.
How is an inheritance tax different from an estate tax?
At the federal level, the two terms are synonymous. However, at the state level, the difference might be who pays the transfer tax. The estate pays the estate tax and the beneficiaries of the estate pay the inheritance tax. In a handful of states, such as Maryland, the state levies both an estate tax and an inheritance tax.
How does leaving money to a charity impact estate tax?
Leaving money to a charity typically results in a charitable tax credit of up to 50 percent and may result in other exemptions from estate tax calculations. When identifying the charities to which you would like to donate, it is important to ensure that they maintain a government-recognized charitable status through public records that are easily accessible through databases like GuideStar.
What if I only want to donate to a charity if none of my loved ones survive me?
Leaving money to a charity typically results in a charitable tax credit of up to 50 percent and may result in other exemptions from estate tax calculations. When identifying the charities to which you would like to donate, it is important to ensure that they maintain a government-recognized charitable status through public records that are easily accessible through databases like GuideStar.
Are charitable bequests ever challenged?
Individuals who leave large gifts to charities in their wills should be aware that a family member might contest the bequest. Some family members feel slighted when they realize that the family member bequeathed more to a charity than to him or her. The probate system allows a family member to file an objection to the executor’s administration of the decedent’s will. These objections can include an objection to the amount of money provided to a charity.
What is a gift tax?
The gift tax is a tax on the transfer of property, in excess of statutory limits, by one individual to another while receiving nothing, or less than full value, in return. In 2023, the federal gift tax annual exclusion amount is $17,000, which means that you will not need to declare gifts that are equal to or less than $17,000 to as many persons as you want during the year. Although you need to prepare a gift tax return if you make a gift in excess to $17,000 to any person, you will not have to pay any tax until you exceed the lifetime gift tax exemption, currently $12.079 million. Very wealthy and/or generous individuals may exceed their lifetime gift tax exemption and be liable for a gift tax on a particular transfer. Most people, however, will never pay this kind of tax, nor will their estate or trust.
In addition, certain gifts are free of gift tax. These include school tuition and education payments made directly to the educational institution, medical expenses paid directly to medical providers, charitable donations, and gifts to a spouse.
What is a generation-skipping transfer tax (GSTT)?
The GSTT was created by Congress in 1976 to close an old loophole used by the wealthy to evade gift and estate tax liability by imposing at tax on transfers to family members who are more than one generation below the transferor or to non-related persons who are more than 37 ½ years younger than the transferor or to trusts for the benefit of these individuals. Currently, the GSTT exemption amount is $12.92 million.
If you have questions regarding estate taxes or making charitable contributions in Washington DC, Maryland or Northern Virginia, request a consultation with one of our Washington DC estate planning attornies today.
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