To understand the complexities of the inheritance or estate tax system, one must first grasp the basics. Taxation levels upon death vary depending on the place of death, the amount of wealth possessed, and the beneficiaries of that wealth. These taxes are generally categorized as either inheritance tax or estate tax.
In this blog, we will not focus on the inheritance tax i.e., the tax levied on beneficiaries of your estate. Although significant in states like New Jersey and Pennsylvania, very few states impose an inheritance tax upon an individual’s death. For all intents and purposes, it is important to know that an inheritance tax is typically levied based on the recipient of your assets upon your death. The amount payable may differ depending on whether the assets are being transferred to a child, niece, nephew, or someone else. If you, the reader of this memo, neither reside nor own property in a state with an inheritance tax, you will likely never encounter these complexities.
The main focus of this memo is the estate tax. The estate tax comprises two levels: state-level estate tax and federal-level estate tax.
Approximately twelve states in the United States – including Washington, Oregon, and New York – impose an estate tax at the state level. When you pass away, if you own assets in these states, the state may seek a share. Each state has its own unique rules regarding the percentage of assets claimed, often based on a sliding scale tied to the value of your assets. Thus, it is advisable to retire and pass away in a state with no estate tax, such as Florida, South Dakota, or Oklahoma.
The second type of estate tax is the federal estate tax. It applies regardless of the state in which you reside at the time of your death, so long as you are in the United States. Currently, in 2023, the federal government does not impose estate tax unless your assets exceed $12.9 million. Married couples can double this exemption amount through a concept known as “portability.” Your estate is subject to federal taxation when its total value exceeds this threshold. The average net worth of an American is significantly below the $12.9 million threshold, which may provide a sense of relief.
However, this relief may be short-lived. In January 2026, the estate tax is scheduled to automatically “sunset.” This means the $12.9 million exemption will be halved and adjusted for inflation. The new threshold is likely to range between $6-7 million. Any amount over that threshold, including life insurance death benefits still in the estate, would be subject to a tax rate of approximately 40%. Who wants to pay the government such a significant portion of their hard-earned assets after a lifetime of paying taxes. If your assets exceed, or are close to, this amount - it is crucial to plan in advance for the looming “sunset”.
How can we avoid giving the government a share upon our passing? The most valuable advice I have received is to have an estate planning attorney, a CPA with experience in this field of tax, a financial advisor, and a trusted insurance agent. These four professionals help navigate tax complexities and ensure your family and loved ones benefit from your life’s work.
One approach attorneys use to navigate estate tax complexities is the use of irrevocable trusts. There are numerous types of irrevocable trusts available, such as those designed for life insurance policies and others designed for your primary residence/vacation home, and the list could go on and on. When implemented correctly, these trusts can exclude the value of these assets from the estate calculation upon your death.
It is important to note that the law may undergo changes between now and January 1, 2026. However, if no changes occur, failing to plan can have significant consequences. Failure to plan is essentially planning to fail.
If you have any inquiries regarding irrevocable trusts, estate tax, inheritance tax, or the 2026 sunset, I encourage you to reach out to your estate attorney. They can provide you with a comprehensive strategy tailored to your family’s needs.