In the U.S., individuals and families with large estates and wealth must pay federal estate taxes, which apply to rich estates worth more than $12.06 million (as of 2022) or more than $24 million for married couples. This blog sheds light on what estate taxes are, what percentage heirs must pay, and how estate taxes are paid.
So, What Exactly is an Estate Tax? What Amount is Owed to the Government?
The federal estate tax, sometimes called the death tax, is a tax on property (cash, real estate, stock, or other assets) applied to the deceased person’s heirs.
After a person’s death, their assets can be subject to estate taxes and inheritance taxes, depending on where they live and the value of their estate. Estate taxes are taxes owed after you die. The taxes apply if your estate (the property you leave behind at death) is greater than a specific value, which is $12.06 million or more.
The estate tax exemption has increased each year. According to Kiplinger, for 2021, the threshold for federal estate taxes was $11.7 million, slightly up from $11.58 million in 2020. For married couples, this threshold doubles, meaning they could protect up to $23.4 million in 2021.
According to Kiplinger, for 2022, a 40 percent federal tax rate applies to estate values exceeding $12.06 million for single individuals and $24.12 million for married couples.
On a historical level, in the U.S., between one and two percent of adults who die each year owe an estate tax.
How Does the Estate Tax Work?
The tax is calculated based on what the assets are worth today, instead of the original value at the time of purchase.
Any appreciation in the estate’s assets over some time will be taxed. For example, if an individual purchased a house at $5 million, but its current market value is $4 million, then $4 million will be applied.
Heirs are also protected against being taxed on peak values that have since decreased.
You calculate the total estate tax due by adding the fair market values of all the decedent’s assets from their death date. The assets that are part of the estate include:
- Investments – stocks, bonds, and other securities
- Business interests and ownerships
- Trusts and annuities
- Other valuable assets like rare collections, jewelry, art, etc.
How is an Estate Tax Paid?
When someone dies, the estate tax is paid from their estate (only estates valued at more than $12.06 million). The remaining assets are then distributed to inheritors.
People with small estates will never have to worry about an estate tax. Only rich estates pay the tax because it is levied only on the portion of an estate’s value that exceeds an exemption level of $12.06 million or more.
Estate taxes can have a significant effect on your beneficiaries. Doing thorough planning for the tax in your estate plan is recommended. Many people with large estates work with a financial advisor to maximize an estate plan for their loved ones.
Can an Individual Avoid Estate Taxes?
An excellent way to prevent paying an estate tax is to keep your estate lower than the threshold. Individuals can set up trusts, such as an intentionally defective grantor trust, which separates income tax from estate tax treatment. Another way is to transfer your life insurance policy so that it is not part of your estate. Those with millions can make strategic use of gifting and charities.
Estate Taxes in New Jersey
Every state has its state-specific exemption amount for estate taxes. The state will not impose an estate tax unless the estate exceeds $12.06 million.
Several states, including the District of Columbia, have an estate tax. However, in New Jersey, you will not need to pay an estate tax (as of January 2018). New Jersey eliminated estate taxes. So, regardless of the size of the estate, if someone dies in or after January 2018, their estate owes nothing to the state of New Jersey.
Depending on the size of the estate located in New Jersey, some taxes may still be owed to the federal government. New Jersey has an inheritance tax. If you think you need help determining if your estate will owe taxes or with estate planning, you may want to seek a wills, trusts, and estates lawyer.
What is the Inheritance Tax?
New Jersey is one of only six states that have an inheritance tax. Nebraska, Iowa, Kentucky, Maryland, and Pennsylvania are other states with this tax.
New Jersey’s rates are between 11 and 16 percent, depending on the amount being inherited and the beneficiaries. Since 1892, New Jersey’s inheritance tax was imposed on property transferred from a deceased person to a beneficiary. Inheritance tax is based on who specifically will receive or has received a decedent’s assets, and how much each beneficiary is entitled to receive. New Jersey imposes the tax on the transfer of ownership of assets.
The amount of tax imposed depends on these factors:
- Who the beneficiaries are and the relation to the decedent?
- The date of death value of the assets and debts that the decedent owned
- Types of assets the decedent owned
- Whether the decedent lived in New Jersey or another state
Partner With a Trusts and Estates Lawyer to Get Expert Advice
When your loved one dies, you do not have to go through estate taxes alone. Many turn to wills, trusts, and estates lawyers for knowledge, advice, and assistance.
Figuring out the ins and outs of estate taxes can be complex. A legal professional can walk you through the specifics of estate taxes and give you some advice and options you had never considered. If you are armed with knowledge, then it will be easier to understand what is owed for an estate tax.
Plainfield Wills Trusts and Estates Lawyers at Herold Law, P.A., Help Clients Understand How Estate Taxes Work
Our knowledgeable Plainfield wills, trusts, and estates lawyers at Herold Law know all about estate taxes and can help you understand what you owe and how estate taxes work. Call us at 908-647-1022 to make an appointment with a trusts and estates law attorney today. From our office in Warren, we assist clients in Warren, Plainfield, and all of New Jersey.