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The federal gift and estate tax is essentially a tax on the transfer of wealth that is imposed and collected at the time of a taxpayer’s death. Both transfers made during a taxpayer’s lifetime in the form of a gift and transfers made at the time of death are subject to the tax. Historically, the estate tax rate fluctuated from year to year; however, with the passage of the American Taxpayer Relief Act of 2012 (ATRA) the tax rate was permanently set at 40 percent. Before considering any credits, deductions, or adjustments to the value of your estate, that means the value of the estate you pass down could be reduced by 40 percent after your death.
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Determining an estate’s federal gift and estate tax obligation is accomplished by adding the value of all qualifying gifts made during your lifetime to the value of all estate assets owned at the time of death. By way of illustration, imagine that you made gifts during your life worth a combined total of $5 million and you owned assets valued at $10 million at the time of your death. The combined total of $15 million would potentially be subject to federal gift and estate taxes. Before any additional considerations, your estate would owe a staggering $6 million in federal gift and estate taxes.
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No. An estate tax is a tax imposed on the estate while an inheritance tax is a tax imposed on an individual when they inherit assets. As such, estate taxes must be calculated and paid by the estate using estate assets prior to any assets being passed down to beneficiaries or heirs. An inheritance tax, on the other hand, is paid by the beneficiary or heir after those estate assets have been passed down.
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Every taxpayer is entitled to make use of the lifetime exemption before calculating federal gift and estate taxes. Think of this as a deduction that comes off the top of the total value of your taxable estate. Historically, the lifetime exemption limit also fluctuated on a regular basis until the passage of ATRA. ATRA set the lifetime exemption limit at $5 million, to be adjusted annually for inflation. Legislation passed in 2017, however, changed the lifetime exemption amount for 2018 and for several years after that. For the year 2022, the exemption amount increased to $12.06 million for individuals and $24.12 million for married couples. In 2026, however, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation.
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Portability refers to a surviving spouse’s ability to use any unused portion of a deceased spouse’s lifetime exemption. For example, imagine that you are married, and your spouse passes away in 2022 leaving behind an estate (including lifetime gifts) valued at $6 million. Because your spouse did not use all his/her current lifetime exemption limit, the remainder would “port” over to you. You could then use that remainder, along with your own lifetime exemption, when your estate is probated.
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The annual exclusion allows each taxpayer to gift up to $16,000 (as of 2022) in assets to an unlimited number of beneficiaries each year tax-free. Gifts made using the annual exclusion do not count toward your lifetime exemption limit. Couples can gift-split and gift assets valued at up to $32,000. By way of illustration, a married couple with four adult children could transfer $128,000 in assets each year without using any of their lifetime exemption amount.
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No. California does not collect an inheritance tax or an estate tax.
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