2024 Death Taxes Explained

A general question I hear from new clients is whether or not they have to worry about "death taxes." The term "death tax" is actually political, and candidates use it as a campaign football. In actuality, there are several different taxes related to estates and inheritances that may or may not apply, and 2024 brought some changes.

There can be taxes at both the federal and state level. This sometimes presents challenges for professionals in estate planning since a client moving to a different state can greatly impact the tax landscape. However, the revocable living trusts we use incorporates language that can maximize estate tax savings for married couples regardless of which state they reside in. Here are the main "death taxes": 

* The federal estate tax kicks in for estates greater than $13,610,000. This means that everything a person owns or controls is reviewed, and if the fair market value of everything is greater than $13.61 million, then the estate tax kicks in just for everything above that amount. It is a common scare tactic in elections for politicians to phrase their messages to let people think that if their estate reaches a certain level that everything is taxed at about 40%. However, this only applies to the amounts above the exemption, but it is a steep 40%. It's understandable that even for an estate of $13.71 million that the family wouldn't want to pay a $40,000 estate tax bill if it is avoidable

* State level estate taxes are also on the books in about 13 states and jurisdiction, and they can have their own levels. For example, the Illinois estate tax kicks in after $4 million, but North Carolina does not have an estate tax. It is important to note that one simple change to federal estate taxes could trigger a bunch of state level estate taxes that really would have no impact on an estate's bottom line. Estate tax changes in 2001 gradually eliminated credits for paying state level estate taxes on the federal form, and a lot of states had an estate tax equal to whatever that credit was. This means that if the federal tax imposed on an estate was $100,000 but it allowed a maximum $20,000 credit for paying state level taxes, the state law provided for a $20,000 tax. This meant in the end the federal government would only get $80,000 and the state got the rest. However, since the deduction was eliminated the state level estate taxes ended up being effectively zero even though technically there was still a state level estate tax on the books.

* Federal gift taxes are linked to the federal estate tax in that all gifts other than to a spouse are deducted from that "bank" of $13.61 million in exemptions you have. However, there are annual exclusions each year of $18,000 per person, per giver. (This means spouses can combine and give $36,000 to each child if they wish even if it is only one person writing the checks). Therefore, gift tax returns are only required if you exceed that amount, and it only reduces bank of estate taxes you have to draw against. There may also be state level gift taxes with different annual exclusion amounts.

* Inheritance taxes are actually completely different from estate and gift taxes because they don't focus on all of the wealth a person passing on has but instead it taxes the person receiving an inheritance. This tax is also wholly a state level tax in the six states of Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. And because it is based on individuals receiving an inheritance, it doesn't matter where the person who passed on lived but on the residence of the beneficiary. For example, if a parent dies in North Carolina leaving $4 million divided equally among their four children who live in Massachusetts, New York, Delaware, and Pennsylvania, only the child living in Pennsylvania will have to pay an tax on their $1 million inheritance. 

* The federal generation skipping tax is probably the least understood of the "death taxes" because it generally applies to so few people. In general, most of my clients want their estate to pass to their children, and only if a child passes on before them do they want assets to go on to the grandchildren. The generation skipping tax was designed to prevent extremely wealthy families from bypassing the children and leaving the inheritance to the grandchildren level with the understanding that the grandkids would take care of their parents, aunts, and uncles. Congress saw this as a potential way to bypass a whole generation of taxation, so they create the generation skipping tax to add a 55% tax on top of estate taxes to make it fiscally unwise to bypass the children. However, this tax also came with exclusions, and they currently match the estate tax exclusions of $13.61 million per person.

This actually brings us to the greatest missed opportunity to provide wealth forever for a family and their descendants in perpetuity. There are specific trusts that can be set up to provide for a family forever without needing to have all of the assets distributed to beneficiaries at any point. (This only works in certain states, but you can have the trust "reside" in whatever state you want by meeting the state criteria). However, this normally would incur estate taxes as each generation passes on if you don't apply the generation skipping tax credits to the assets going into this trust. But that means it doesn't just bypass taxation at the grandchild level, but for all future generations.  So this trust that I call a Perpetual Legacy Trust, if drafted correctly, can provide for all future generations of descendants without any estate or generation skipping taxes for the wealth in the trust provided the principal keeps growing. Yes it will be subject to income and capital gains taxes each year, but not those biting 40% and 55% estate and generation skipping taxes. For more information, check out the YouTube video Wealth Forever?! 

We are entering a presidential election year, and you can expect to hear a lot of rhetoric around the "death tax," but hopefully this article will help you understand exactly what those taxes are and mean. For more information on general estate planning without a focus on taxation, check out the complimentary online program at http://www.FreeTrustCourse.com.