Estate Planning For Estate (Death) Tax

Congress sets the amount that an individual can transfer tax-free either during life or at death. The current estate tax exemption is so high that very few estates will have to pay an estate tax. 

In 2017, Republicans in Congress and President Trump doubled the federal estate tax exemption and indexed it for inflation. In 2022, the exemption is $12.06 million ($24.12 million for couples). That means that as long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes. The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $12.06 in 2022. But you can still give any number of other people $16,000 in 2022 each per year without the gifts counting against the lifetime limit. In 2026, the exemption is set to drop back down to the previous exemption amount of $5.49 million (adjusted for inflation).

The gift and estate tax rate is 40 percent. This means that if you transfer more than $12.06 (in 2022) either during your life or upon your death, your estate will be taxed at 40 percent.

In addition, spouses can leave any amount of property to their spouses, if the spouses are U.S. citizens, free of federal estate tax. The estate tax exemption is also “portable” between spouses. This means that if the first spouse to die does not use all of his or her $12.06 million exemption, the estate of the surviving spouse may use it. So, for example, let’s say John dies in 2022 and passes on $10 million. He has no taxable estate and his wife, Mary, can pass on $14.12 million (her own $12.06 million exclusion plus her husband’s unused $2.06 million exclusion) free of federal tax. (However, to take advantage of this Mary must make an “election” on John’s estate tax return. (Check with your CPA).)

The currently high federal estate tax exemption, coupled with the portability feature, might suggest that “credit shelter trusts” (also called AB trusts) and other forms of estate tax planning are needless for other than multi-millionaires, but there are still reasons for those of more modest means to create a Trust or do other planning, and one of the main ones is state taxes. Slightly less than half the states also have an estate or inheritance tax and, in most cases, the thresholds are far lower than the current federal one.

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David Wingate is an estate planning and elder law attorney at Estate and Elder Planning by David Wingate. The Estate and Elder Planning office services clients with powers of attorneys, living wills, Wills, Trusts, Medicaid and asset protection. The Elder Law office has locations in Frederick, Washington and Montgomery Counties, Maryland.

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