There is some confusion about the taxes that can be imposed when assets are being transferred after someone dies. People hear the terms “inheritance tax” and “estate tax,” and they automatically assume that they are used to describe the same tax.
In fact, this is really not the case at all. An estate tax is levied on the portion of an estate that exceeds the credit or exclusion. There is just one instance of taxation before the estate is transferred to the heirs.
With an inheritance tax, the transfers to each individual beneficiary are subject to taxation unless the beneficiary is exempt.
State-Level Inheritance Taxes
On the federal level, there is no inheritance tax, but there are six states in the union that have this type of tax. We practice in Michigan, and there is no inheritance tax in our state, but this does not necessarily mean that you should have no concerns at all.
If you inherit property that is located in a state that has an inheritance tax, you would be required to pay it unless you are exempt. The states that have inheritance taxes are Pennsylvania, New Jersey, Maryland, Kentucky, Nebraska, and Iowa.
There is an inheritance tax in Iowa through 2024, but it is being phased out, and it will longer exist in 2025. To give you an idea about the exemptions, in Kentucky, a surviving spouse, parents, children, grandchildren, and siblings are exempt.
State Estate Taxes
There are state-level estate taxes in 12 states and the District of Columbia, but Michigan is not among them. Once again, you may not be out of the woods if you live here, and you own valuable property in a state with an estate tax.
It would be applicable on the transfer to a beneficiary if its value exceeds the exclusion in that state. Some states have relatively low exclusions. For example, the exclusion in Massachusetts is just $1 million.
Federal Estate and Gift Tax
The federal estate tax is applicable everywhere in the country, and it can make a major impact because it carries a 40 percent maximum rate. A $5 million exclusion was established for 2011, and that figure indexed for inflation was retained through 2017.
At the end of that year, the Tax Cuts and Jobs Act was enacted, and a provision contained within it doubled the estate tax exclusion with another inflation adjustments. In 2018, it was $11.18 million, and this year, it is $11.7 million.
On January 1, 2026, the provision that raised the exclusion is going to sunset. At that time, the exclusion will go back to $5.49 million, which was the figure is 2017.
It will probably never reach the president’s desk, but the For the 99.5 Percent Act has been introduced to Congress by Senator Bernie Sanders. This measure would reduce the exclusion to $3.5 million, and it would raise the top rate to 45 percent for the first $10 million.
The exclusion would graduate upward from there, with a maximum rate of 65 percent for estates that exceed $1 billion in value.
There is no estate tax to pay if you transfer assets to your spouse as long as you are married to an American citizen because there is an unlimited marital deduction. The exclusion is portable, so a surviving spouse can use the exclusion would have been available to their deceased spouse.
You cannot give large gifts while you are giving to avoid the estate tax, because there is a gift tax in place. The exclusion applies to lifetime gifts and the estate that will be transferred after you are gone.
That’s the bad news, but the good news is that there is an additional $15,000 per person, per year exclusion. You can give this much to any number of people each year tax-free without using any of your unified lifetime gift and estate tax exclusion.
We Are Here to Help!
If you are ready to work with a Troy, Michigan estate planning lawyer to put a plan in place, we are here to help. Even if your estate will not be taxed, your plan should be custom crafted to suit your needs, and we can and will make sure that your wishes are carried out effectively.
You can schedule a consultation if you call us at 248-251-1001, and you can use our contact form if you would rather send us a message.