Federal Estate Tax

The federal estate tax is a tax on assets transferred at death and on transfers made during a person's lifetime. However, for most U.S. citizens the federal estate tax is not a problem because the exemption from the tax is $11.7 million, starting Jan. 1, 2021. In other words, if someone dies after that date, and their net worth is less than $11.7 million, it is unlikely there will be any estate tax owed. The exemption will expire on Dec. 31, 2025, and the amount will be $5.6 million after that date unless changed by Congress and the President.

THE FEDERAL ESTATE TAX is a tax on any transfer of assets from a deceased person's estate to his or her heirs, except for transfers to spouses.

ALL OF THE ASSETS owned by the deceased person are subject to the estate tax, including property in joint tenancy, living trusts, IRAs, and life insurance (if the insurance was owned or controlled by the decedent).

TAX RATE: Assets that are subject to the estate tax (in other words, that part of an estate greater than $11.7 million for a single person and $23.4 million for a married couple) are taxed at 40 percent.

THE MARITAL DEDUCTION: Assets that are transferred from one spouse to the other spouse at death are not taxed. This is called the "marital deduction," and there is no limit on how much can be transferred to the surviving spouse.

PORTABILITY: If a surviving spouse does not use his or her exclusion amount by funding an exemption trust or making bequests to anyone other than his or her spouse, the surviving spouse can use the unused exclusion amount of the first spouse to die.

Here are the requirements for portability:
1. The decedent and the survivor must have been married.
2. Death must have occurred after Dec. 31, 2010.
3. An election to use portability must be made on the estate tax return of the decedent.
4. Portability applies only to the surviving spouse, not to other family members.
5. Portability applies for both estate and gift tax purposes.
6. Portability does not apply to the generation skipping tax.

THE FEDERAL GIFT TAX is intended to limit the amount that can be transferred to persons other than a spouse without incurring a tax. Annual gifts of up to $15,000 can be made during 2021 to an individual without incurring a gift tax. If the gift is made by a married couple from their jointly owned assets, it can be as much as $30,000 per year. There is a lifetime gift exemption of $11.7 million per donor, but the gifts made during lifetime will be deducted from the donor's exclusion amount.

WHAT IS A DISCLAIMER? A disclaimer is a refusal to inherit all or part of an asset or of an entire estate. The reason for doing this is that the person who is entitled to receive a bequest either doesn't need or doesn't want the bequest. In most cases the bequest would only make a sizable estate larger and increase the amount of federal estate taxes that will eventually be collected from that estate. The disclaimer operates as though the disclaimant died before the decedent, and the decedent's estate plan specifies a contingent beneficiary, who is often the disclaimant's children. If that is the case, the effect is that the bequest goes to the disclaimant's children, and is never taxed in the disclaimant's estate. In some cases, the amount that is disclaimed will go to a disclaimer trust.

DOES CALIFORNIA HAVE AN ESTATE TAX OR INHERITANCE TAX? There is no state tax on inheritances or gifts for California residents. California had an inheritance tax until 1981, when it was voted out in a statewide election.

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