Understanding the Federal Estate Tax: What You Need to Know

What You Need to Know

Estate planning is a crucial aspect of securing your financial legacy and ensuring your loved ones are taken care of after you’re gone. One key element of estate planning that often raises questions is the federal estate tax. In this article, we will explore the basics of the federal estate tax, including its current exemption threshold and the upcoming changes slated for 2026.

What is the Federal Estate Tax?

The federal estate tax, often referred to as the “death tax,” is a tax imposed by the U.S. government on the transfer of your assets after you pass away. Essentially, it is a tax on the value of your estate that exceeds a certain threshold, which is determined by the IRS.

Exemption Threshold and the 2026 Sunset:

For calendar year 2023, the federal estate tax exemption threshold is $12.92 million per individual, meaning that estates valued at less than this amount are not subject to federal estate tax. For married couples, this exemption can be effectively doubled, allowing them to shield up to $25.84 million from federal estate tax through proper estate planning.

However, it’s important to note that changes are on the horizon. The current exemption threshold is set to sunset in 2026. This means that unless new legislation is passed, the exemption threshold will be cut in half, impacting more estates.

Tax Rate:

If your estate’s value exceeds the exemption threshold, the federal estate tax applies at rates that can be quite substantial, often reaching up to 40%. This rate can substantially diminish the wealth that you intend to pass on to your heirs.

Planning to Minimize the Impact:

Estate planning plays a crucial role in minimizing the impact of the federal estate tax, especially in light of the upcoming changes in 2026. There are various strategies that can help you protect your assets and reduce your estate’s tax liability:

  1. Gift Tax Exclusions: You can make annual gifts to your loved ones, tax-free, up to a certain limit, which reduces the size of your taxable estate.  The current exclusion if $17,000.
  1. Irrevocable Trusts: Setting up certain types of irrevocable trusts can help you remove assets from your taxable estate while still allowing you to control their use and distribution.
  1. Charitable Giving: Donating a portion of your estate to charitable organizations can reduce your taxable estate while supporting causes you care about.
  1. Spousal Portability: Proper estate planning can allow a surviving spouse to inherit the unused portion of the deceased spouse’s federal estate tax exemption.

New York Estate Tax:

In addition to the Federal estate tax, New York State also imposes an estate tax.  The NYS estate tax can be as high as 16% for larger estates.  Proper planning can help avoid or minimize this tax.

Understanding the federal estate tax and its implications for your estate planning is essential to ensure that your wealth is passed on as you intend. The federal estate tax laws may change over time, and the sunset of the exemption threshold in 2026 adds an additional layer of complexity.

To navigate these complexities and protect your legacy for generations to come, it’s crucial to work closely with an experienced estate planning attorney who can keep you informed about current regulations and develop a tailored strategy that aligns with your goals. Additionally, keep an eye on legislative updates as they may impact your estate planning decisions.

I feel that every client deserves courageous and compassionate representation. This goes far beyond even the best law school education or practice in the most prestigious firms, but must be based in one's own experience and ethics, and practiced on a deep-rooted, personal level.

Antony M Eminowicz, PLLC Antony M Eminowicz, PLLC

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