You have worked hard, managed your finances well, and invested wisely to protect your future and care for your family. It’s crucial not to lessen your vigilance when it comes to your estate. Unfortunately, the Tax Cuts and Jobs Act (TCJA) passed in 2017 has lulled some individuals into a false sense of security.
In 2021, a person’s estate is exempt from federal taxes as long as it is under $11.7 million. (The amount over the exemption can be taxed at up to 40 percent.) But the current exemption, which doubled under TCJA, is set to expire in 2026 barring further legislation. And the Biden administration has already proposed cutting much of the estate tax exemption.
Even estates well within the federal exemption may still be impacted by state death taxes. In 2021, Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Massachusetts, Maine, Hawaii, and Washington, D.C., all levy estate taxes on estates above $1 to $5.9 million. Among the list, the highest estate tax rates vary from 12 to 20 percent.
Another six states levy an inheritance tax: Nebraska, Iowa, Kentucky, Pennsylvania, Maryland, and New Jersey. The states’ highest inheritance tax rates vary from 10 percent (Maryland) to 18 percent (Nebraska). All six states exempt spouses from paying inheritance tax; some extend at least a partial exemption to immediate relatives.
Although some states reduced or eliminated estate tax burdens to retain wealthy residents over the past decade, pandemic-related budget woes may reverse that trend. For example, the District of Columbia reduced its estate exemption from $5.67 million in 2020 to $4 million in 2021. And a taxable $10 million estate could owe nearly $1 million in estate tax to D.C.
There may be ways to reduce an estate’s taxes or fees: various types of trusts; transferring assets into a Limited Liability Company or Family Limited Partnership; gifting assets; putting money into a life insurance policy; even moving to another state. Estate planning can be complex, and it’s crucial to get it right. We would be happy to work with you, your attorney and tax professional to find solutions for your situation.
We do not provide tax or legal advice; please consult an accountant or attorney for more information.