Death and Taxes and Death Taxes
“Tis impossible to be sure of anything but Death and Taxes.”
Christopher Bullock, 1716
The idiom has endured over 300 years because of the harsh reality of it: we are all on a march towards the grave down a path lined with tax collectors along the way. While the Grim Reaper only visits us once, the Tax Man is a frequent guest. Perhaps you’ve heard of one final collection, the oft whispered about “death tax.”
This post isn’t meant to reflect my personal opinions about taxation in general, but rather to shed light on the ominous-sounding death tax.
“In this world, nothing can be said to be certain, except death and taxes.” – Benjamin Frankiln, 1789
When people talk about the death tax, they are typically referring to the Estate Tax. The IRS website defines the Estate Tax as “a tax on your right to transfer property at your death.” Whether that property is transferred through a will, a trust, or intestate succession, it is subject to the Estate Tax. If you don’t love the idea of a tax on property transferred to your heirs, there are a few pieces of good news (and some not so good news.)
Bad news #1: The Estate Tax rate is pretty high – about 40%.
Considering that the corporate tax rate is sitting right around 21% and that Amazon paid about a 1.2% tax rate in 2019, 40% is a pretty staggeringly large number.
Good news #1: Very few people currently qualify for the Estate Tax.
In 2020, each individual’s estate has to be worth more than $11,580,000 at the time of his or her death before an Estate Tax will apply. That means that a married couple’s assets can be worth up to $23.16 million without owing an Estate Tax.¹
Bad news #2: Estate Tax exemption has never been so generous (and isn’t guaranteed to remain this generous.)
The current tax exemption is higher than it has ever been. As recently as 2001, the estate tax exemption was only $675,000 per person, which subjected a much larger percentage of the population to estate taxes. The current high exemption level is set to expire in 2025 unless it is renewed and could be lowered by legislation before then. A bill has already been presented to lower the current exemption by about 70%.²
Good news #2: A good estate plan can protect you from Estate Taxes even if you are above the exemption amount
If you anticipate that your estate could be worth more than the current or future exemption amounts, you should contact an experienced estate planning attorney. He or she can recommend steps you can take during your lifetime to reduce the size of your taxable estate at death.
While death and taxes may be inevitability, death taxes are more escapable than most people realize.
This article is for educational purposes only and does not constitute legal, accounting, or tax advice. Everyone’s situation is different, and you should take any questions about your potential estate taxes to a licensed attorney and/or accountant.
¹ This number can be reduced for certain gifts you gave to an individual worth more than $15,000 in a given year, but this scenario will not apply to most people either. For more information on how gifts affect your Estate Tax, refer to https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes or consult with an attorney.
² It should be noted that lowering the exemption by 70% would still only impose estate taxes on 0.5% of people who die each year.