Estate Tax Under the New Tax Law

Martinson & Beason

The new tax law, formally known as the Tax Cuts and Jobs Act, has a significant impact on the Federal Estate Tax, often referred to as the Death Tax. Currently, wealth transfers in an estate are tax-free up to $5.49 million for individuals and $10.98 million for married couples. Through portability, the surviving spouse can carry over the predeceased spouse’s exemption, effectively raising the exemption to $11.58 million for widows and widowers.

The new tax law doubles the exemption threshold before estate taxes are owed. The new rates will be $11,200,000 for individuals and $22,400,000 for married couples. This means that fewer families will be faced with paying estate taxes.

What Is The Federal Estate Tax?

According to the Internal Revenue Service (“IRS”), the “Federal Estate Tax is a tax on your right to transfer property at your death.” It consists of an accounting of everything you own or have a certain interest in at the date of your death.

What Did The Tax Bill Do To The Federal Estate Tax?

The new tax law became went into effect on January 1st, 2018. Although it did not kill the Estate Tax outright, it did double the exemption amount for individuals and married couples. For individuals, the Tax Bill increased the Federal Estate Tax exemption to $11,200,000. For married couples, the Tax Bill increased the Federal Estate Tax exemption to $22,400,000.

Is the Federal Estate Tax Applicable To You?

In order to determine if the Federal Estate Tax is applicable to you, compare the value of your net estate (i.e., Gross Estate less debts/expenses; charitable transfers; and transfers to a spouse) against the Federal Estate Tax exemption threshold (i.e., $11,200,000/$22,400,000).

If your Net Estate is less than the Federal Estate Tax exemption, the Federal Estate Tax does not apply to you.

However, if your Net Estate is greater than the Federal Estate Tax exemption, your estate likely is subject to Federal Estate Taxes and your estate will have a Federal Estate Tax liability. The formula for determining your Federal Estate Tax liability is as follows: Taxable Estate (i.e., Net Estate less Federal Estate Tax exemption) multiplied by 40%.

If the value of your estate is near the estate tax exemption threshold, it is in your best financial interest to have an effective tax planning strategy in place to avoid exceeding the exemption amount. Otherwise, the federal government can potentially lay claim to up to 40% of your assets.

For more information on how the Federal Estate Tax exemption amount may impact you, please feel free to contact the law firm of Martinson & Beason, P.C.