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What Is the Estate Tax (Simple)
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Get StartedWhat Is the Estate Tax?
Think of the estate tax as a tax on really large inheritances. When someone dies and leaves behind a lot of money and property, the government might take a percentage before it goes to the heirs. It's basically the government's way of taxing wealth when it transfers from one generation to the next.
The estate tax only kicks in when someone's total estate is worth more than a certain amount. For 2024, that amount is $13.61 million per person. So unless you're leaving behind more than $13.61 million, your family won't owe any federal estate tax.
How Does It Work?
Here's how it works in simple terms. When you die, everything you own gets added up. This includes your house, bank accounts, investments, life insurance, business interests, and personal property. If that total is under the exemption amount, there's no estate tax to pay.
If your estate is worth more than the exemption, only the amount over the limit gets taxed. The tax rate can be pretty steep - up to 40% on the amount above the exemption.
Let's say someone dies with an estate worth $15 million. The first $13.61 million is exempt. Only the remaining $1.39 million would be subject to estate tax. This is where understanding trusts becomes incredibly valuable for tax planning purposes.
What About California?
Here's some good news for California residents. California doesn't have its own state estate tax. You only need to worry about the federal estate tax. Some states like New York and Washington have their own estate taxes with lower exemption amounts, but California isn't one of them.
This means if you live in California and your estate is under the federal exemption limit, your heirs won't pay any estate tax at all. Even if your estate is over the limit, they'll only pay the federal estate tax. Many Californians find that creating a comprehensive estate plan can help minimize these tax burdens significantly over time.
Who Actually Pays the Tax?
This is important to understand. The people who inherit your money don't personally pay the estate tax. The estate itself pays the tax before distributing what's left to the beneficiaries.
Your executor or estate administrator handles filing the estate tax return and paying any tax owed. They use money from your estate to pay the bill. So your heirs receive whatever is left after taxes and other estate expenses. This process is separate from probate proceedings, though both may happen simultaneously depending on your estate's structure.
Married Couples Get Extra Benefits
If you're married, you get some special advantages. When one spouse dies, they can leave everything to the surviving spouse without any estate tax. This is called the unlimited marital deduction.
Even better, married couples can combine their exemptions. This is called "portability." If the first spouse doesn't use their full exemption, the surviving spouse can use the leftover amount. This means a married couple can potentially pass up to $27.22 million to their heirs without estate tax in 2024. Planning this properly often involves setting up a living trust structure.
What Counts Toward Your Estate?
Pretty much everything you own counts toward your estate value. Your house, vacation home, bank accounts, retirement accounts, stocks, bonds, business interests, and life insurance policies you own all get included. The valuation process can be complex, especially for unique assets like collectibles or business interests.
Some things might surprise you. Life insurance proceeds count if you own the policy. Gifts you made within three years of death might be added back. If you have control over trusts or other assets, those might count too. This is why many people benefit from learning what assets belong in a trust to potentially reduce their taxable estate.
The Exemption Amount Changes
The estate tax exemption amount goes up almost every year due to inflation adjustments. But there's a big change coming. The current high exemption amounts are scheduled to drop significantly in 2026 unless Congress acts.
Starting in 2026, the exemption is set to fall to about half the current amount - roughly $7 million per person. This means many more families could face estate tax in the future. Smart planning now can help you prepare for these potential changes, regardless of what Congress ultimately decides.
Planning Strategies
If your estate might be subject to estate tax, there are ways to reduce or eliminate it. You can make annual gifts during your lifetime. For 2024, you can give up to $18,000 per person per year without using up your lifetime exemption. These gifts remove future appreciation from your taxable estate.
Charitable giving can also reduce your taxable estate significantly over time. Money left to qualified charities doesn't count toward your estate for tax purposes. Some people set up charitable remainder trusts that provide income during their lifetime while ultimately benefiting charity.
More complex strategies include various types of trusts that can remove assets from your taxable estate while still providing benefits to you or your family. Grantor trusts, charitable lead trusts, and generation-skipping trusts all serve different purposes in estate tax planning. Understanding why you should have a trust becomes crucial when your estate approaches taxable levels.
Do You Need to Worry?
For most California families, the estate tax isn't a concern right now. With the current $13.61 million exemption, very few estates actually owe this tax. But if you have significant wealth or expect the value of your assets to grow substantially, it's worth planning ahead.
Even if you're nowhere near the current exemption limit, remember it's scheduled to drop in 2026. If you think your estate might be affected by the lower future exemption, now might be a good time to explore planning options. Real estate appreciation alone could push some California estates over future thresholds.
Consider also that estate tax planning often overlaps with other important planning goals. Strategies that reduce estate taxes might also help with income tax planning, asset protection, or ensuring smooth transfers to the next generation.
Getting Professional Help
Estate tax planning can get complicated quickly. If you think your estate might be subject to estate tax, it's smart to work with professionals who understand both tax law and estate planning. They can help you understand your situation and explore strategies that make sense for your family.
Many people start by learning how to start your estate plan from scratch before diving into complex tax strategies. Even basic estate planning documents like wills and trusts can be structured in ways that provide tax benefits for larger estates. The key is starting the conversation early, before you actually need advanced tax planning strategies.
