What Is The Estate Tax?

The estate tax is a tax on the transfer of assets between generations, i.e., from parents to their heirs. It is imposed on the estate’s total value and any gifts made before the person passes away above a person’s exemption amount. In 2024, that exemption amount is $13.61 million, up from the 2023 exemption amount of $12.92 million.

These taxes are intended to reduce the wealth concentration by taxing inherited wealth. Still, they can be minimized or completely avoided through estate-tax planning. But how?

Estate-Tax Planning Overview

Estate-tax planning comes into play when you want to pass assets to the next generation. With estate-tax planning, you can arrange your affairs to reduce the amount of federal and state estate taxes you and your heirs will face and maximize how much you pass on to the next generation.

Importantly, estate-tax planning can significantly impact how much you pass on to heirs because of how high federal and state estate taxes are.

Federal Estate Tax

The federal estate tax is a tax on assets transferred from a person who passed away to their heirs. It is paid by the dead person’s estate and is due nine months after the person’s death. The federal estate tax rate is 40%. That means that if you are leaving your beneficiaries a $23.61 million estate, the estate will owe $4,000,000 in federal estate taxes. And that’s even before accounting for any state estate tax liability!

What is the Federal Gift and Estate Tax Exemption?

Each individual has a lifetime gift estate tax exemption. This exemption is the value of assets you can give away, throughout your life and after your death, without being subject to federal estate tax.

For 2024, this exemption is $13.61 million per person. Because the exemption is per person, married couples can give away double that amount. In addition, as of 2024, you have an annual gift exclusion which allows you to give up to $18,000 per person/year that doesn’t count towards the gift tax exemption.

However, it’s essential to know the federal estate tax exemption level is scheduled to be reduced by 50% to about $7.2 million when the Tax Cuts and Jobs Act sunsets in 2026, which is why it’s essential to get started with estate planning sooner rather than later.

State Estate Tax

Currently, each state has its own estate tax rules. In some states, you won’t owe state estate taxes when passing assets on and in others, you’ll pay marginal rates. Zero-estate taxes make some states attractive for wealthy individuals and those with large estates, as they can pass on their estates to their heirs without worrying about the government taking a significant portion of their wealth. However, if the estate’s value exceeds the federal tax exemption amount, then the estate is responsible for paying the remaining tax.

So, how do all of these apply in the state of Michigan as an example?

Example of Estate Tax in Michigan

Let’s say your total taxable estate is $18 million. Critically you won’t owe any estate taxes in Michigan since there aren’t any Michigan estate taxes but you will owe Federal estate taxes as the federal gift exemption is $13.61 million. Just from the Federal estate tax you/your estate would owe ~$1,701,800.

Or in other words, your heirs would get $16,298,200 after the estate tax if you didn’t do any estate planning work. Fortunately, with some estate planning, you could avoid those Federal estate taxes entirely.

Conclusion

While federal estate taxes are 40%, some states have their own estate taxes in addition to the federal tax, so it is crucial to begin thinking about tax planning strategies sooner rather than later. We can definitely help you with that!

Read more about other U.S. states and their estate taxes, use our Guided Planner tool to find helpful solutions, or schedule a time to talk with our expert team.

About Valur

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From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $1.1 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!