The Planner's Perspective: What is the Death Tax?

Paul Morrone |

By Paul Morrone CFP®, CPA, MSA

The estate tax, often referred to as the ‘death tax,’ has been widely publicized as discussions about tax reform continue to surface in the news. There is much ambiguity surrounding the estate tax, which also includes the extremely complex gift and generation skipping transfer tax (GSTT) systems, largely because it will only affect a small percentage of households. Under the current regulations, only estates in excess of $5.49mm (in 2017, indexed annually) are subject to this type of taxation. Said differently, with some proper planning, a married couple can pass about $11.0mm estate tax free to their heirs. For those over this threshold, however, Uncle Sam takes a 40% bite out of every dollar over this amount, which can quickly add up to a substantial sum of money.

To complicate matters further, 13 states and the District of Columbia also have death taxes that they assess on their residents. Depending upon where you live, this tax can be applicable at amounts as little as $675k (NJ), which could be accounted for simply with the equity in one’s home. The rate assessed on estates at the state level ranges from 0.8%-20% depending upon where you live (WA tops the chart at 20%). In CT, the estate tax exemption is $2.0mm and the maximum assessed tax rate is 12%, which could be considered ‘middle of the road’ when compared against the other 13 states that assess this sort of tax.

Doing some quick math will tell you that for an estate subject to both federal and state estate taxes, the total tax rate can easily exceed 50%. Living in a state that does impose a death tax, especially if that state’s exemption differs from the federal exemption, further reinforces the need for proper planning to maximize the protection of your assets from unexpected taxes at death. While estate taxes are certainly not the only reason to have well designed and flexible estate plan, the tax saving benefits of proper planning cannot be overlooked. In many cases, there may not be a way to avoid estate taxes completely, especially for higher net worth individuals, however, there are ways to mitigate and proactively address it so that your executor, trustee or other fiduciary is prepared with a plan in the event you don’t wake up for breakfast.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.