Introduction to The “Death Tax” and Gift Tax-(and why you likely do not need to fear the death tax)
At McCarthy Law Office, we proudly serve the Cincinnati and Westside communities, providing trusted legal counsel for all your estate planning needs. One topic that frequently comes up in conversations surrounding estate planning is the so-called “death tax”—more formally known as estate taxes. Estate taxes can be complex, but understanding the basics can help you make informed decisions about your financial legacy.
What Are Estate Taxes?
An estate tax is a tax on the transfer of property after someone passes away. It’s assessed on the value of a person’s estate, which includes assets such as real estate, investments, savings, and other property. When a person dies, their estate may be subject to estate taxes if its value exceeds certain thresholds set by federal and state governments.
In the past, many states, including Ohio, had their own estate tax systems. However, Ohio no longer imposes a state estate tax, which has simplified the estate planning process for residents. While Ohio has eliminated its state-level estate tax, the federal estate tax still applies to estates that exceed certain thresholds.
The Federal Estate Tax Exemption
The federal government has significantly raised the estate tax exemption in recent years. As of now, the federal estate tax exemption is just under $14 million per individual. This means that if the total value of your estate is less than this amount, you won’t be required to pay any federal estate tax. However, estates that exceed this amount may be subject to estate taxes on the value above the exemption limit.
For married couples, this exemption can be even more significant. Federal estate tax portability allows a surviving spouse to inherit any unused portion of their deceased spouse’s exemption. This could potentially double the exemption for the surviving spouse, provided they file an estate tax return (even if no tax is owed) to claim portability. The ability to transfer unused exemptions is a powerful tool in tax planning, particularly for high-net-worth individuals.
Federal Gift and Estate Tax Exemption
In addition to the estate tax exemption, there are also federal gift tax exemptions to consider. As of recent updates, the federal gift and estate tax exemption has increased to $13.99 million per person. This amount includes both lifetime gifts and assets transferred at death. The annual exclusion for gifts has also increased to $19,000 per donee, per donor, meaning you can give up to $19,000 to any individual without it counting toward your lifetime exemption.
These increases provide more opportunities for individuals to transfer wealth without incurring estate taxes. However, it’s important to remember that these exemption amounts are set to “sunset” at the end of 2025, meaning they may decrease unless new legislation is passed to extend or modify them. For this reason, it may be wise to take advantage of the increased exemptions before the potential reduction.
Portability and Planning for the Future
One important consideration for married couples is the concept of portability. This allows a surviving spouse to utilize their deceased spouse’s unused federal estate tax exemption. To take advantage of portability, the surviving spouse must file a federal estate tax return (even if no estate tax is owed) within a specific period following the decedent’s death. This period remains five years after the date of death, so it’s crucial to act promptly if you want to maximize this benefit.
Portability can be particularly helpful for couples whose combined estate may exceed the federal exemption amount. By properly utilizing portability, the surviving spouse can avoid unnecessary estate tax liability and keep more wealth within the family.
Required Minimum Distributions and Retirement Accounts
For those with qualified retirement plan accounts, it’s important to be aware of changes to the rules regarding required minimum distributions (RMDs). Starting in 2023, individuals who reach the age of 72 after December 31, 2022, must begin taking RMDs at age 73. This change affects individuals who have retirement accounts like IRAs, 401(k)s, and similar plans, and it can impact your overall estate planning strategy.
Planning Ahead
Estate planning can be complex, but with the right guidance, you can ensure that your assets are distributed according to your wishes and in the most tax-efficient way possible. With federal estate tax exemption amounts set to decrease at the end of 2025, it’s a great time to review your estate plan and take action to maximize the benefits of the current exemption limits.
At McCarthy Law Office, we are here to help you navigate the intricacies of estate planning. If you’re ready to start planning for the future, contact us today to schedule a consultation. We proudly serve the Cincinnati and Westside communities and are dedicated to helping you protect your legacy for generations to come.