In 2016, an estate worth less than $10,000 will be taxed at a marginal tax rate of 18 percent. At the top of the estate tax tables, an estate worth more than a $1 million will pay $345,800 plus 40 percent of the amount in excess of $1 million. While this may seem like a lot of money, the reality is that most estates do not have to pay any tax at all.
First, there is a federal estate tax exemption of $5.45 million in 2016 that is indexed yearly for inflation. What this means is that anyone with an estate worth less than $5.45 million most likely owes no tax. In addition to the lifetime exemption, individuals may make unlimited gifts of $14,000 per person per year without incurring any tax consequences. Married couples may give up to $28,000 per person per year.
After exemptions and exclusions, the effective tax rate on an estate is much lower than the marginal tax rate. For instance, an individual who leaves behind a $7 million estate would owe 40 percent of $1,550,000 after the lifetime exemption. This would result in a $620,000 tax bill or 9 percent of $7 million, which is lower than the marginal tax bracket.
As part of routine estate planning, it may be necessary to think about the tax implications of any decision made. For example, a trust designed to reduce a possible estate tax bill may be unnecessary due to the lifetime and yearly exemptions. Those with large estates or have many items to pass down to their children may decide to talk to an attorney about how they can do so without unintended tax consequences.