It depends. The federal government imposes estate taxes at your death only if your property is worth more than a certain amount based on the year of death. By some estimates, this means more than 99 percent of estates do not pay any estate tax. In 2018, the exemption limit is $11,200,000 ($5,490,000 in 2017). Estates worth more than $11,200,000 are taxed at 40 percent. For married couples, the exemption is $22.4 million. There are a couple of important exceptions to the general rule, however. All property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen and estate taxes won’t be assessed on any property you leave to a tax-exempt charity.
Most states impose estate taxes of some kind. In many cases, there’s a state inheritance tax only where a federal estate tax would apply. But some states have estate taxes that are “uncoupled” from the federal tax, and some have inheritance taxes.
Inheritance taxes are paid by your inheritors, not your estate. Typically, how much they pay depends on their relationship to you.
Twelve states and the District of Columbia impose an estate tax while six states have an inheritance tax. Both New Jersey and Delaware got rid of their estate tax starting in 2018 (but kept their respective inheritance taxes). Maryland is now the only state with both an estate tax and an inheritance tax.
- District of Columbia
- New York
- Rhode Island
- New Jersey
There are several ways. One common way to do this is to leave your children, directly or in trust, an amount up to the estate tax exemption amount ($11,200,000 in 2018) and the balance to your spouse.
In most states that base inheritance taxes on the federal estate tax, steps that avoid federal tax also avoid state tax. If your state imposes some other kind of estate tax, your professional advisor can help you minimize state tax by taking actions specifically adapted to that tax.
If you live in two states, for instance, Florida in winter and summer in New Jersey, your inheritors may be able to save on estate taxes if you make your legal residence in the state with lower inheritance taxes.
You can give up to $15,000 in 2018 ($14,000 in 2017) per person per year with no gift tax liability. Gifts exceeding that amount are counted against a gift tax exemption of $11,200,000. Gifts exceeding that exemption are subject to gift tax. At your death, these gifts could become your taxable estate (with a credit for gift tax paid).
There are, however, a few exceptions to this rule. You can give an unlimited amount of property to your spouse unless your spouse is not a U.S. citizen, in which case you can give away up to $100,000 indexed for inflation; the 2018 amount is $152,000 ($149,000 in 2017) per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. Money spent directly on someone’s medical bills or school tuition, is exempt as well.