Estate and inheritance tax

According to the U.S. Internal Revenue Service, the Estate Tax "is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death." In addition to federal taxation, some states also impose an estate tax or an inheritance tax on property transfers at death.

Assets included in the gross estate
In the U.S. an individual's gross estate consists of the total fair market dollar value of all property and assets in which an individual had an interest at the time of his or her death. The gross estate figure is the gross value of a person's estate before liabilities such as debt and taxes are deducted.

In addition to assets included in an individual's net worth, the gross estate includes assets such as the death benefit value of life insurance (owned or controlled by an individual) as well as certain additional property interests. In addition, how property is titled, for example, as sole property or the variations of joint property, determine what needs to be included in the gross estate. The table below shows how many types of commonly held property are valued in the gross estate.

529 plan estate benefits
529 Plans confer a potential estate tax benefit to donors. Contributions to a 529 Plan are removed from the donor's estate and are transferred to the estate of the beneficiary. All yearly contributions below the $14,000 per recipient gift tax provision are removed from a donor's estate, and a special tax provision allows donors to donate up to five years' gifts (currently $70,000) to a 529 plan in a single year without incurring gift tax. The donation is, for gift tax purposes, spread over the ensuing five years. The donations (prorated) are only brought back into the donor's estate if the donor dies or terminates the account within the five year extended period. If married, you and your spouse can "split gifts" and give $28,000 per recipient, and $140,000 for spreading the gift over five years. If you select the five year program you must elect it by filing IRS Form 790 You must also file this return for any year your gift to a beneficiary exceeds the annual gift tax exclusion limit. You must also file the 709 for any year in the five year spread period if you make any additional gift to the beneficiary.

Federal exemptions and tax rates
Each U.S. citizen has a lifetime estate tax exemption that allows a tax-free transfer of a set dollar amount to beneficiaries. The exclusion amount is $11.58 million in 2020 and $11.7 million in 2021.

Special rules for married couples. A surviving spouse can retain use of any unused portion of a deceased spouse's individual tax exemption. This gives the couple a total $23.16 million exemption in 2020, and $23.4 million in 2018, split between them in any way that provides the greatest tax benefit.

Example (using older thresholds): Dr. Smith leaves $4 million to his widow; no estate tax is owed because property left to a spouse is tax-free. The widow then dies, leaving $7 million (her own $3 million plus the $4 million she inherited from her husband) to their children. Her estate won't owe any estate tax, even though the estate is over the exemption amount, because the estate can use $2 million of the husband's unused exemption. To take advantage of this provision an estate tax return must be filed when the first spouse dies--even if no tax will be due.

The following table provides the federal exemption and estate tax rates for U.S. citizen taxpayers subject to the estate tax.

The taxable estate
If the gross estate is subject to estate tax, the following deductions are allowable for determining the taxable estate:


 * Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass "outright." In some cases, certain life estates also qualify for the marital deduction. The marital deduction is not allowed to non-citizen spouses. (I.R.C. § 2056(a))
 * Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate. (I.R.C. § 2055(a))
 * Mortgages and Debt.
 * Administration expenses of the estate.
 * Losses during estate administration.

When to file
You must file Form 706 to report estate and/or Generation-Skipping Transfer (GST) tax within 9 months after the date of the decedent's death.

Nonresident aliens do not use Form 706, but instead use Form 706-NA.

State estate and inheritance taxes
For U.S. citizens, the federal estate tax applies only to very large estates (above $11.4 million in 2019). But many estates that don’t owe federal tax do owe a separate state estate tax. It depends on where the deceased person lived and owned property.

The estate tax gets a lot more attention, but people who inherit property may also have to pay a separate inheritance tax, which is imposed by six states. If you inherit property from someone who lived in one of these states, you may end up paying some of your inheritance in taxes.

Inheritance tax is a state tax only; the federal government does not have an inheritance tax. Inheritance tax is imposed in addition to the federal estate tax and any state estate tax.

Whether or not you will owe inheritance tax depends on how closely related you were to the person who left you money. It doesn’t matter, in most states, how big the whole estate is or how much you inherit. You might owe state inheritance tax even if you inherit a small amount of property.

If you inherit from your spouse (or registered domestic partner or civil union partner), you are exempt from inheritance tax in all states. Charitable beneficiaries may also be exempt from the tax. Depending on state law, children who inherit either pay nothing or pay low rates. The states imposing estate and inheritance taxes are illustrated in the map to the right and are included in the table below. Because estate and inheritance taxes are subject to frequent change, a link to each state's most relevant estate tax website is provided. Also included are links to a summary of each state's estate and inheritance tax, courtesy of the Nolo legal site.

When to file
Check with the relevant state, but they generally require a return filed within nine months from the date of death.

Also check for a tax discount. For example, Pennsylvania offers a 5% discount if taxes are paid within 3 months of the decedent's death.

Non-US residents
The estate tax exemption for U.S. citizens is not available to nonresident aliens. For these individuals, the U.S. estate tax exemption is just $60 thousand. Investors domiciled in Canada or in one of the few countries with a US estate tax treaty may be able to use a higher exemption, one that is pro-rated to that allowed to U.S. citizens, but check the treaty carefully. It is important to note that an investor's country of domicile is not necessarily the same as their country of residence.

The following nations (in addition to the U.S.) impose an estate or inheritance tax: