Estate taxes are a key consideration for high-net-worth families, yet they’re often misunderstood. This article explains how estates are taxed and provides practical guidance to help you navigate the complexities—whether you’re an executor, a beneficiary, or planning for your family’s financial future.
2024 Federal Estate Tax Rates and Thresholds
Estates with a “net” value exceeding $13,610,000 in the year 2024 are subject to a Federal estate tax at a rate of 40%. The value of the estate can be calculated based not only on the date of the decedent’s death but also on an “alternate valuation date” which is six months following their death.
Choosing the alternate valuation date is mandatory for all assets and is particularly useful if the asset values decline post-mortem. Typically, without an extension, the estate tax payment is due nine months after the decedent’s death.
Deferring Federal Estate Taxes
Federal estate taxes can be deferred under several circumstances:
1) For Reasonable Cause (up to 12 months):
Executors may have the tax-deferred if they demonstrate “reasonable cause,” such as an inability to access estate assets within the 9-month window due to litigation, or when assets consist of royalties or other income received over time.
2) For Undue Hardship (year-by-year up to 10 years):
An “undue hardship” deferral is possible if selling assets within the 9-month period would result in a fire sale situation — where no market is present or selling during that timeframe would severely undervalue the assets.
3) Active Trade or Business Assets (up to 14 years):
Under Internal Revenue Code Section 6166, deferral is allowed for active trade or business assets, provided they make up more than 35% of the estate. The deferral is over 14 years, with interest payable for the first four years, followed by installments of interest plus principal.
Estate / Inheritance Taxes at the State Level
In addition to Federal estate taxes, certain states also levy their own estate and/or inheritance taxes as of 2024. These states include Connecticut, DC, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, NY, NJ, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington, each with its own exemptions and top tax rates between 15% and 20%.
Understanding Your “Basis”
In estate tax planning, “basis” refers to the value used to determine capital gains or losses when an asset is sold. Assets inherited from an estate typically receive a “step-up” in basis, meaning their value is adjusted to the fair market value at the date of the owner’s death, potentially reducing capital gains taxes for beneficiaries.
Distribution of Tax Responsibilities
Typically, each individual is responsible for their share of the tax. However, estate planning documents like wills can modify this, often stipulating that specific bequests are free of tax, which is instead borne by the residue of the estate.
Penalties
Failure to pay estate taxes when due can result in penalties, for which the executor may become personally liable.
Conclusion
Proactive estate tax planning can help protect assets, minimize tax burdens, and ensure a smooth transition of wealth.
Consult with an experienced estate planning professional for tailored guidance on navigating complex tax laws and identifying strategies to preserve wealth and protect your family’s financial future.