We do not discuss estate taxes very often because they do not impact most Americans. However, there is the condition of being “land rich and cash poor.” In addition, there is going to be a wider estate tax net cast in the near future, so more families will be exposed to this tax.
Estate Tax Exclusion
The majority of people do not have to worry about estate taxes because there is a multimillion dollar exclusion. This is an amount that can be transferred tax free. The remainder of the estate would be subject to taxation. At the present time, the exclusion is $12.06 million, and the top tax rate is 40 percent.
Spouses do not have to be concerned about estate taxes. This is because there is an unlimited marital deduction. This means that any amount of property you transfer to your spouse is estate tax free. This only applies if you are married to an American citizen.
Federal Gift Tax
The estate tax would not be much of a problem if you could give lifetime gifts to your family and friends. Unfortunately, there is a stumbling block. There has been a federal gift tax in place continuously since 1932, and the gift tax and estate tax are unified.
This means that the $12.06 million exclusion applies to lifetime gifts as well. If you use all of your exclusion giving gifts while you are living, the entirety of your estate could be subject to estate taxes.
In addition to this unified exclusion, there is an additional $16,000 annual exclusion. You can give this much to an unlimited number of people each calendar year tax-free without using any of your unified exclusion.
Tax Cuts and Jobs Act Sunset Date
From 2011 through 2017, the exclusion was in the $5 million range indexed for inflation. At the end of 2017, the Tax Cuts and Jobs Act was enacted. It essentially doubled the exclusion with an inflation adjustment, so it was $11.18 million in 2018.
Each year, there have been additional adjustments to account for inflation, and this is why it stands at $12.06 million this year. This level will be retained through 2025.
On New Year’s Day in 2026, the provision in the Tax Cuts and Jobs Act that established the higher exclusion will sunset. At that time, the exclusion will go back down to the 2017 level of $5.49 million indexed for inflation.
Limited Window of Opportunity
Since the high exclusion is going to evaporate in just a few years, you can give lifetime gifts while the exclusion is still over $12 million. In addition to direct giving, this exclusion can be used to fund certain types of tax efficiency trusts tax-free.
State Level Estate and Inheritance Taxes
While we are on the subject, we should share some information about state level taxation. There are 12 states with state estate taxes, but Oklahoma is not one of them. If you own property in one of these states, the estate tax would be applicable if the value of the property exceeds the exclusion in that state.
Five states have inheritance taxes, and this is a different type of taxation. An inheritance tax is levied on distributions to each individual nonexempt inheritor, and there are typically no large exclusions. That’s the bad news, but the good news is that close relatives are exempt.
Attend an Education Program!
We have a strong belief in the value of education, and we make an effort to provide learning opportunities. Our education events cover the most important topics, and they are offered on a complimentary basis.
You can see what’s on tap if you visit our event schedule page, and follow the instructions to register if you decide to join us.
Need Help Now?
If you have already learned enough to know you should work with an Oklahoma City estate planning lawyer to put your plan in place, there is no time like the present. You can send us a message to request a consultation appointment, or we can be reached by phone at 405-843-6100.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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