Death and Taxes

Benjamin Franklin once said, “In this world, nothing is certain except death and taxes.”  Assuming that’s true, one might assume that the so-called “death tax” (e.g., the estate tax) is simply unavoidable. After all, the death tax (estate tax) combines both elements—death and taxes!  It is a tax that naturally arises as a result of a death.   

But is this really the case?  Is the estate tax unavoidable?

Before we answer that question, let’s first clear something up.

What is an Estate Tax?

An estate tax (which can sometimes be referred to as a kind of “death tax”) is a tax that is levied against the property remaining (e.g., the estate) after its owner has passed away.  Estate taxes can be levied by both the state and federal governments.

Currently, the State of California generally mimics the federal estate tax rules.  In other words, a California estate will only owe an estate tax to the State of California if it also qualifies to pay a federal estate tax. If the federal estate tax doesn’t apply to a California estate, then neither will the California estate tax.    

So, what about the federal estate tax then?

We have some good and bad news about the federal estate tax…

The Federal Estate (and Gift) Tax:

Generally– if an unmarried person passes away in year 2023, their estate will only be taxed by the federal government if that estate is valued at more than $12.92 million dollars.  And even then, the 40% tax will only apply to such amount greater than the $12.92 million dollar exemption.  In essence, the first $12.92 million is not taxed. 

As for married couples, they essentially get double the exemption amount (e.g., $12.92 million dollar exemption per spouse).  Yes, that’s right, if you are married and happen to die in 2023, then if your spouse takes the proper steps before he/she also passes away, then your combined estate will essentially get to avoid any federal (and California) estate tax on the first $25.92 million dollars. 

This is why the federal estate tax only affects roughly 2,000 of the approximately 2.8 million people expected to die in America within a given year.

(Remember, we are only talking about the federal estate tax because California’s estate tax effectively mimics the federal exemption amounts. As to those estates located within states which may have lower exemption amounts than the federal limits, they can expect to be more susceptible to pay an estate tax even where a federal estate tax may not be applicable.)

Taxes are Subject to Change:

The current law which established these historically high federal exemption amounts will phase-out in January of 2026.  After that date, the federal estate tax exemption will no longer be so friendly on estates.  It will drop to roughly $5,000,000 per spouse (plus whatever inflation adjustment is added to the exemption amount by then).  That is, however, unless the federal government passes a new law to keep exemption amounts at the higher rates before the phase-out date.  

The Biden Administration has proposed tax laws that would drastically affect estate taxes and the estate tax exemption. At this time, however, the changes proposed by the Biden Administration have not been enacted by Congress. Stay tuned to this blog and our social media pages for future updates on this and other issues that affect estate planning.

===

For more reading, check out: Should I Form a Corporation, LLC, or Partnership?)