As an individual or family that has acquired assets and properties over the years, it is highly likely that you have heard of estate tax, also known as inheritance tax. This tax is the levy imposed on the transfer of a deceased person’s estate to their heirs and beneficiaries. In this article, we will discuss what estate tax is and everything you need to know about it.
What is estate tax?
Estate tax is a federal tax that is levied on the transfer of assets from a deceased individual to their heirs or beneficiaries. It is also sometimes referred to as a death tax. This tax is levied on the fair market value of the assets that the deceased leaves behind.
The estate tax is only applicable to estates that exceed a certain threshold, known as the exemption limit. As of 2021, the Federal estate tax exemption limit is $11.7 million for individuals and $23.4 million for married couples. Any property that is above these limits will attract an estate tax.
Who pays the estate tax?
The estate tax is paid by the executor of the estate, who is responsible for managing the deceased’s assets and liabilities during the probate process. The executor is also responsible for filing the estate tax return and paying the tax.
In some cases, the beneficiaries of the estate may also be required to pay taxes on their inherited properties. This is usually the case when the assets they receive exceed the federal gift tax limit. The gift tax limit for 2021 is $15,000. Any gift that exceeds this limit is subject to gift tax.
How is estate tax calculated?
Estate tax is calculated based on the fair market value of the assets in the estate at the time of the deceased’s death. The value of the assets is determined by an appraiser or a valuation expert. The appraised value of the assets is then subtracted from the tax exemption limit to determine the amount of estate tax owed.
The tax rate for estate tax varies depending on the value of the estate. As of 2021, the estate tax rate ranges from 18% to 40%. This means that the more valuable the estate, the higher the estate tax rate.
How to reduce estate tax liability
There are several ways in which you can reduce your estate tax liability. One way is to make lifetime gifts to your heirs and beneficiaries. This reduces the value of your estate, which in turn reduces your estate tax liability. However, it is important to note that any lifetime gifts are subject to gift tax if they exceed the $15,000 gift tax limit.
Another way to reduce estate tax liability is to create a trust. This allows you to transfer your assets into a trust, which then becomes a separate legal entity. The assets in the trust are no longer considered part of your estate and are therefore not subject to estate tax.
In conclusion, understanding estate tax is essential for anyone who has acquired assets and properties over the years. Estate tax is the levy imposed on the transfer of a deceased person’s estate to their heirs and beneficiaries. It is important to know how estate tax is calculated, who pays the tax, and how to reduce estate tax liability. By being aware of these key factors, you can ensure that your estate is managed efficiently and your heirs and beneficiaries receive their rightful inheritance.