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What Are Estate Taxes and How Do They Work?

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May 1, 2024 •  Emily Hicks Law, PLLC
Estate taxes, also known as inheritance taxes, are taxes imposed on the transfer of an individual's assets upon their death. Learn more about the limits and what you can do.

Estate taxes, also known as inheritance taxes or death duties, are taxes imposed on the transfer of an individual's assets upon their death. They are levied on the estate left behind by a deceased individual before the assets are passed on to their heirs or beneficiaries. Estate taxes are governed by specific laws and regulations, and they can significantly impact the distribution of wealth among heirs. This article will provide a more in-depth look at estate taxes. 

How Estate Taxes Work

When a person passes away, their estate is evaluated to determine its total value, including cash, real estate, investments, retirement accounts, business interests, and personal belongings. The value of this estate is then subject to taxation by federal and sometimes state governments, depending on the jurisdiction.

The government sets a certain exemption limit for estates, which means only estates exceeding this limit are subject to estate taxes. For instance, in the United States, the federal government applies an estate tax only to estates valued above a certain amount, which can change over time based on tax laws in place.

Estate Tax Exemptions and Rates

Exemption limits define the threshold above which an estate becomes taxable. In some regions, only the portion of the estate exceeding this exemption is taxed. Tax rates on estates that surpass the exemption limit are determined based on a progressive scale, meaning higher estate values incur higher tax rates.

The U.S. federal estate tax exemption is $13.61 million per individual in 2024 (a combined $27.22 million for a married couple). However, any estate value exceeding this threshold will likely be taxed at rates starting from 18% and could go up to 40% for the portion exceeding the exemption. There is no state estate taxes as Florida eliminated its state-level estate tax back in 2005.

Estate Planning and Strategies

Individuals often employ various strategies to minimize the impact of estate taxes on their wealth transfer. Some common methods include setting up trusts, making use of annual gift exclusions, establishing life insurance policies, and creating charitable trusts or donations.

Trusts can be structured to hold assets separately from the estate, potentially reducing the taxable amount. Moreover, gifting assets during one's lifetime can lower the overall value of the estate subject to taxation.

Reference: UrbanTurf, (November 20, 2023): What Are Estate Taxes and How Do They Work?

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