US Federal Estate Tax Explained

Guest Contributor: Peter J. Merrick, TEP

Website: EXIT WITH SUCCESS - EXPERT IN CROSS-BORDER RISK

When someone dies, before their assets are passed on to their beneficiaries, there's a tax that might come into play: the federal estate tax. However, the majority of estates won't be subject to this tax. Why? Because in 2023, only estates valued over $12.92 million for individuals or $25.84 million for couples are affected.

How It Works:

Essentially, upon death, if your estate—including cash, real estate, and retirement accounts—surpasses the aforementioned thresholds, it will be taxed. Anything below these thresholds is exempt.

Understanding the Rates:

For simplicity's sake, if you pass away in 2023 and your estate is worth $12.92 million or less, you’re in the clear. Anything above this amount is taxed based on incremental tiers. For instance, any portion of your estate over $500,001 but under $750,000 is taxed at a rate of 37%. Notably, amounts over $1 million face a maximum rate of 40%.

Consider this scenario: Your estate is valued at $13.36 million in 2023. This means you’re $440,000 over the threshold. Your tax would be the base rate for the relevant tier plus a percentage of the overage, leading to an estate tax of $135,400.

State Considerations:

On top of federal concerns, certain states have their own estate taxes. In 2023, states including Washington, Oregon, Illinois, New York, and more have established their thresholds, which can range from $1 million to $9.1 million.

History & Exemptions:

The U.S. estate tax, often linked with wartime funding needs, has its origins in the 1790s. Its modern form was codified in 1916 during World War I. Over the years, the exemption amounts have shifted. By 2017, the exemption for estates and lifetime gifts was $5.49 million for individuals, doubling for couples. This rose to $12.92 million by 2023.

Estate vs. Inheritance Taxes:

While the estate tax pertains to the act of transferring assets after death, inheritance tax concerns the act of receiving these assets. The former is an obligation of the deceased's estate, while the latter is paid by the living beneficiary. Notably, only six states have an inheritance tax.

Summary:

Although most Americans won’t be impacted by the federal estate tax, its existence is often debated. Critics label it a "death tax," but proponents argue it's a significant revenue stream for the government. For those nearing the threshold, it's prudent to seek expert guidance in estate planning to ensure maximum benefits for your beneficiaries.

There are two solutions to mitigate this problem. If you are a professional advising a client who falls into this situation or if you personally have cross-border interests in the US, click here to schedule a complimentary introductory meeting with Peter J. Merrick by CLICKING HERE.

About the author. Peter J. Merrick, TEP, is a Commentator/Keynote Speaker & Expert in US/ Canadian/International Cross Border and Estate Planning and Insurance & Annuity Planning - Author of The Business Novel - The King of Main Street. To read reviews, please click here.

Who is Peter J. Merrick, CFP, TEP?

Over three decades, Peter specialized in de-risking and saving his clients up to 40% of their wealth that would have otherwise been paid out because of poor planning. These proven solutions effectively shelter income, reduce taxes on income and estates and defer or eliminate tax on investments and creditor-proof assets for domestic and international clients.

Peter is also an author:

Peter has written three comprehensive LexisNexis business, legal, tax, succession and estate planning textbooks. For 18 years, Peter wrote a column for LexisNexis called "The Bottom Line," one of the largest professional tax and accounting publications.?Peter was also a university and college finance and financial planning lecturer for over 12 years.

In 2019, Peter relocated to San Diego, California, from Toronto, Canada. Right now, he sees a number of wealth-saving opportunities resolving long-ignored issues for Canadians in corporate planning, cross-border US and international planning, financial, philanthropic, and estate planning implementation, utilizing Canadian/US Life Insurance and Canadian/US Annuity strategies.

Peter works with high-net-worth individuals and their legal, tax and financial professionals performing Canadian estate freezes and terminal tax planning, as well as those who seek to relocate to the US or have financial interests in the US from places like Canada and other national jurisdictions.

It is absolutely essential that you partner with and work with an expert familiar with the Canadian Income Tax Act, the IRS Tax Code, and US/International Tax Treaties before implementing any strategy in the areas of Canadian estate freezes, terminal tax planning, and cross-border planning.

Let's set up a complimentary introductory meeting with Peter J. Merrick to review your policies by CLICKING HERE.

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