What is estate tax, and how does it work?

What is estate tax, and how does it work?

The estate tax is used to generate tax revenue from the transfer of wealth between deceased family members and their heirs. It is paid by the estate, not by the heirs in most cases.

Your estate is the total value (at your date of death) of possessions left behind. An executor appointed by the court is placed in charge of the estate. The executor must pay outstanding debts and may be responsible for liquidating assets to repay your debts. Once all debts and expenses are paid for the executor distributes the estate assets based on your will, or state law if no will is left.

Each estate is provided an exemption of $11.2 million (Up from $5.5 million in 2017). Your estate is subject to estate tax for any value over the exemption amount. If your estate is valued at $12.2 million, only $1 million would be subject to estate tax. However, when the estate assets are passed down from a spouse the exemption is unlimited.

With the increased exemption, almost everyone reading this article will never have to worry about estate tax. But why have you heard so much about estate tax? Back in 1997, the estate exemption was $600,000 with the highest rate of estate tax at 55% (versus 40% currently). Within our lifetime estate tax has applied to more taxpayers, but currently only affects less than .1% of the population.

Our articles are not intended to be tax advice. To seek tax advice regarding your specific tax situation, it is best practice to consult with a Certified Public Accountant.