We consistently recommend that all of our clients have a thorough and effective estate plan in place. Establishing legal planning documents dictating how and to whom important assets will transfer protects your legacy and your loved ones.
Effective estate planning also addresses financial obstacles that can present themselves during or after the transfer of wealth, especially in large estates worth millions of dollars. California has not had its own estate tax since 1982, but the federal estate tax is 18% to 40%. The value of your estate and whether or not you have effectively planned for the tax exemption will determine whether you ever face that tax.
What is the Federal Estate Tax Exemption?
The federal estate tax exemption provides an avenue to avoid any taxes on the transfer of your property through your estate. This tax would be taken straight out of the value of your estate before it ends up in the hands of any chosen beneficiaries. It is important to differentiate between the estate tax and the inheritance tax which is a tax owed by beneficiaries when they inherit assets (California does not have an inheritance tax).
For 2023, the estate tax exemption is $12,920,000 for individuals and $25,840,000 for married couples. It is estimated that this number will rise well above $13,000,000 and could even eclipse $14,000,000 in 2024 and 2025. After that, barring legislative action, the estate tax exemption will revert to the pre-2018 number which was $5,000,000.
Any estate valued at or below $12,920,000 for an individual who dies in 2023 will be exempt from the federal estate tax. The number of any given year represents what the value of estates can be in that calendar year before the federal tax applies.
What Are The Estate Tax Rates?
If your estate exceeds the estate tax exemption in a given year, only the amount above the exempted limit will be taxed. A percentage of that amount will be taken in taxes and, after $10,000, a “base tax” will be applied on top of the tax. Those taxes are as follows, per the IRS:
|
Taxable Estate Amount |
Tax Rate |
Base Tax |
|
$0 to $10,000 |
18% |
$0 |
|
$10,001 to $20,000 |
20% |
$1,800 |
|
$20,001 to $40,000 |
22% |
$3,800 |
|
$40,001 to $60,000 |
24% |
$8,200 |
|
$60,001 to $80,000 |
26% |
$13,000 |
|
$80,001 to $100,000 |
28% |
$18,200 |
|
$100,001 to $150,000 |
30% |
$23,800 |
|
$150,001 to $250,000 |
32% |
$38,800 |
|
$250,001 to $500,000 |
34% |
$70,800 |
|
$500,001 to $750,000 |
37% |
$155,800 |
|
$750,001 to $1,000,000 |
39% |
$248,300 |
|
$1,000,000+ |
40% |
$345,800 |
So, using these numbers if you have an estate worth $13,500,000 in the year 2023, your federal estate tax would be calculated as:
- $13,500,000 (your estate value) minus $12,920,000 (federal estate tax exemption) equals $580,000 (your taxable estate)
- 37% of $580,000 (because it falls within the $500,001 to $750,000 range) equals $214,600
- $214,600 plus a base tax of $155,800 equals $370,400 in taxes paid on your estate
You can see how quickly this tax adds up without proper strategy. There are ways to effectively strategize for this tax and get your estate closer to or even below the tax-exempt limit through gifting and other means.
At The Law Offices of Tyler Q. Dahl, we have the expertise to ensure our clients have a tax strategy and estate plan that maximizes their tax exemption and protects their wealth for future generations. Our team is ready to get started today.
Dahl Law Group
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