TheĀ federal estate taxĀ is a tax imposed by the U.S. government on the transfer of an individual's assets to their heirs or beneficiaries after their death. It applies only to estates that exceed a certain threshold, known as theĀ estate tax exemption. The estate tax is calculated on the value of the deceased's taxable estate, which includes assets such as real estate, investments, cash, and other properties owned at the time of death.

Key Features of the Federal Estate Tax:

  1. Exemption Threshold:
    • The estate tax applies only if the estate's value exceeds the federal exemption limit. For 2024, the exemption is $13.92 million per individual or $27.84 million for married couples, provided they electĀ portability(a process allowing one spouse to transfer their unused exemption to the other). The lifetime exemption limits can be found Ā 
    • Estates below this threshold are not subject to the federal estate tax.
  2. Taxable Estate Calculation:
    • The gross estate includes the fair market value of all assets owned at death.
    • Deductions are allowed for certain expenses, debts, charitable contributions, and the value of assets left to a surviving spouse.
    • After deductions, the remaining value is considered theĀ taxable estate.
  3. Tax Rate:
    • The federal estate tax rate is progressive, with rates ranging fromĀ 18% to 40%on amounts above the exemption threshold.
  4. Portability:
    • If a spouse dies, their unused exemption can be transferred to the surviving spouse, effectively doubling the amount of assets shielded from taxation for a married couple.
  5. Gifting and the Estate Tax:
    • Lifetime gifts exceeding theĀ annual gift tax exclusion($18,000 per recipient in 2024) reduce the donorā€™s estate tax exemption. This means large gifts made during a personā€™s lifetime may count toward the estate tax threshold.

How It Works:

When someone dies, their estate undergoes a valuation process. If the estateā€™s value exceeds the exemption, the executor files an estate tax return (IRS Form 706) and pays any taxes owed. Estates of individuals who planned well, such as through irrevocable trusts or charitable giving strategies, may significantly reduce their tax burden.

Purpose:

The federal estate tax is designed to prevent the accumulation of wealth across generations without taxation. Understanding the estate tax is essential for effective estate planning, especially for individuals with high-value estates.

Working with a financial advisor or attorney can help minimize the tax impact and protect your assets for the benefit of your family.

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