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Estate Tax Basics: Who Has to Pay and How Does It Happen?

5 min read

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By Thomas Rosen

Discover whether you need to worry about estate taxes taking a bite out of your legacy or inheritance and what you might be able to do to reduce those costs.

Estate tax can be expensive. The top rate is 40%, which means some people are losing almost half of their inheritance to the federal government.

Luckily, the vast majority of people (around 99.9%) won’t have an estate big enough to be taxed at all by the feds, much less one that makes the highest bracket. Find out more about the estate tax, who pays it and some ways you might be able to shelter your assets below.

What Is the Federal Estate Tax?

Someone has a right to ensure their property is transferred to appropriate beneficiaries at the time of their death. But it’s a right that could come with a cost in the form of the federal estate tax. This is a tax that’s levied on the value of your estate at the time it transferred ownership post death.

The total value is determined by adding up all your assets, including cash-type items and investments as well as the fair market value of real property. Your liabilities, or debts, are then subtracted from that total, and the resulting number is the value of the estate. This number is important because it determines whether or not a federal estate tax is levied and how much it is.

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Who Has to Pay the Federal Estate Tax?

Federal estate taxes are not owed if the total value of the estate is less than $11,580,000 for those passing away in 2020. The IRS updates this figure annually. For example, here’s a look at the threshold for the past 5 years.












While a large, expensive home or land and some decent investments can bump you into estate tax territory, the majority of people come in under these numbers. That’s especially true when you consider allowed deductions, which are discussed below.

Can You Reduce Your Estate Tax Costs?

If you see that the value of your estate is likely to be above the federal tax threshold and you want to protect your assets for beneficiaries or avoid expensive taxes, you do potentially have some options.

Estate Tax Deductions

First, the IRS allows some deductions, which are taken off the value of the estate. That can help bring your number down below the threshold if you’re near it. Deductions include:

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Set Up a Trust

Some assets can be transferred to your beneficiaries before you pass away. You can do this by placing them in an irrevocable trust, which transfers ownership to someone else while limiting how and when those individuals can access the wealth.

For example, you might put funds in a trust meant to cover the cost of someone’s college expenses, and they can only take from the funds for those approved expenses. Some people also put life insurance policies in a trust to help ensure those assets are protected.

Give Gifts Now

Reduce the amount of value your estate has by doling it out slowly over time. You can give a certain amount to each individual annually without paying a gift tax on the amount. From 2018 through 2020, the amount you can give without being taxed is up to $15,000.

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What Is the Deceased Spousal Unused Exclusion?

The DSUE is a rule that allows estate tax exemptions to be portable between spouses. Basically, it means that if one spouse doesn’t use his or her total entitled exemption, the other spouse can use what’s left.

In practice, it works like this:

Do States Charge Their Own Estate Tax?

Some states have their own estate or inheritance tax. Some follow the federal guideline for estate tax thresholds, and some charge taxes on lesser amounts. So, it’s possible that you could owe state taxes on an estate even if federal taxes aren’t owed.

Note: Estate taxes can be a complex topic. Whether or not you need to file an estate tax return and how much you end up paying depends on so many factors. Most people do choose to work with an estate attorney or tax professional for those reasons.


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Thomas Rosen



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