If you have been very successful from a financial standpoint, you have to be concerned about the potential impact of estate taxes. Many people contend that the death tax is not fair, because your estate is comprised of resources that you have been able to retain after paying innumerable taxes throughout your life.
Why should your death be a taxable event in and of itself?
This a good question, but whether it is fair or not, the federal estate tax is a fact of life. The good news is that there is a credit or exclusion that allows you to pass along a certain amount of property free of taxation, and it is quite high.
At the time of this writing in 2020, the federal estate tax exclusion is $11.58 million. We should point out the fact that the top rate of the tax is 40 percent, so a significant chunk of your legacy could potentially be absorbed by taxation.
The matter of “portability” in this context refers to the ability of a surviving spouse to use the exclusion that was allotted to his or her deceased spouse. Prior to 2011, the estate tax exclusion was not portable. To put it in a nutshell, when you died, your estate tax exclusion died with you. Your surviving spouse would only have one exclusion to utilize going forward.
Getting back to the matter of fairness, in most cases, both people that are in a marriage contribute to the wealth that is accumulated. If the estate is the product of the efforts of two individuals, why should the surviving spouse have just a single exclusion?
In this instance, the common sense argument won out. When a tax reform measure was enacted in 2011, the estate tax exclusion became portable between spouses. Portability has been retained since then, so the surviving spouse would have a total exclusion of $23.16 million using the figures that are in place for 2020.
Another thing to understand about the estate tax and married couples is the fact that there is an unlimited marital deduction. You can transfer any amount of money or any other type of property to your spouse free of taxation, as long as your spouse is a citizen of the United States.
If you are thinking that you can simply give gifts to your loved one while you are living to avoid the estate tax, we have some bad news to pass along. There is a gift tax in place that is unified with the federal estate tax. The $11.58 million exclusion is a unified exclusion that encompasses large lifetime gifts along with the estate that be transferred to your heirs after you are gone.
Hawaii State Estate Tax
The majority of the states in the union do not have state-level estate taxes, but there is a separate estate tax in Hawaii. On the state level, the exclusion is considerably lower than the federal exclusion at just $5.49 million. As a result, you could face exposure to the state estate tax even if you are exempt from the federal tax.
Some states that have estate taxes do not allow for portability between spouses. Fortunately, we are on the right side of this dividing line. The Hawaii state estate tax exclusion is portable, so a surviving spouse would have two exclusions to utilize.
Download Our Estate Planning Worksheet
If you would like to learn more about estate taxes and other important topics, we have developed a valuable resource that is available to you through this website. Our attorneys have produced an educational worksheet that you can use to gain a more thorough understanding of the process.
It is being offered free of charge at the present time, and you can visit our estate planning worksheet page to obtain access to your copy.
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