Home Estate Tax What You Didn’t Know About Estate Tax Rates

What You Didn’t Know About Estate Tax Rates

What You Didn’t Know About Estate Tax Rates

Estate tax, also known as inheritance tax, is a tax that is levied on the wealth or assets left behind by someone after they’ve died. It can be a controversial topic, with some arguing that it is a necessary way to redistribute wealth, while others see it as unfair and punitive. Regardless of your stance, it’s important to understand the current state of estate tax rates and how they might impact you or your loved ones.

Background on Estate Tax Rates

The estate tax has a long history in the United States, dating back to 1797. Over the years, it has undergone numerous changes, with rates fluctuating depending on economic and political conditions. In its current form, the estate tax is a federal tax that affects only the wealthiest Americans – those with estates valued at more than $11.7 million per person. This threshold is periodically adjusted for inflation.

For estates that exceed this threshold, the current tax rate is 40%. This means that if someone dies with a taxable estate worth $15 million, their estate will owe $1.32 million in federal estate tax. However, it’s important to note that the taxable estate is not necessarily the same as the total estate. It excludes some assets such as life insurance payouts and retirement accounts, which are typically left to designated beneficiaries.

Beyond the federal estate tax, there are also state-level estate taxes to consider. Currently, there are 12 states (plus Washington, D.C.) that have an estate tax. These states often have lower thresholds than the federal government, meaning that estates below the federal threshold could still be subject to state taxes. Some states also have different tax rates or other unique provisions.

Estate Tax Changes Under Biden

President Joe Biden has proposed several changes to the estate tax during his presidency. One proposal is to lower the estate tax exemption from its current level of $11.7 million per person to $3.5 million per person. This change, if enacted, would significantly increase the number of estates subject to the estate tax. It’s estimated that around 87,000 estates would be affected, up from the current estimate of around 1,900.

Biden has also proposed increasing the estate tax rate from its current level of 40% to 45%. While this may not seem like a significant increase, it could result in thousands or even millions of dollars in additional taxes owed for high-net-worth estates.

Another key proposal by Biden is to eliminate the “step-up in basis” provision for inherited assets. Currently, when someone inherits an asset such as a stock or real estate, the value of that asset is “stepped up” to its current market value. This means that if the asset has appreciated significantly since it was originally purchased, the heir can sell it without owing taxes on the appreciation that happened prior to the inheritance. Eliminating this provision would mean that heirs would owe taxes on the full amount of appreciation when they sold the asset.

These proposals are still subject to change and must be passed by Congress before they can become law. However, it’s important for high-net-worth individuals and their advisors to stay informed and consider potential impacts on their estate planning strategies.

Estate Tax Planning Strategies

There are several strategies that individuals can use to minimize their estate tax liability. Some common strategies include:

Annual Gift Exclusion: One way to reduce the size of your estate is to gift assets to your heirs while you’re still alive. The IRS allows individuals to gift up to $15,000 per year (per recipient) tax-free. This means that if you have three children and three grandchildren, you could give each of them $15,000 per year without triggering gift tax or reducing your estate tax exclusion.

Irrevocable Life Insurance Trust (ILIT): If you have a large life insurance policy, it could potentially push your estate above the federal estate tax threshold. An ILIT is a trust that is funded with a life insurance policy and is designed to be outside of your taxable estate. This can help to reduce your estate tax liability while still providing for your heirs.

Qualified Personal Residence Trust (QPRT): If you have a valuable home or vacation property that you want to pass on to your heirs, a QPRT can be a useful strategy. This is a trust that allows you to transfer ownership of the property to your heirs while still retaining the right to use the property for a certain number of years. When the trust terminates, the property passes to your heirs but is not included in your taxable estate.

Charitable Trusts: If you have charitable goals and want to reduce your estate tax liability, a charitable trust can be an effective tool. These trusts allow you to make a charitable donation while still retaining some control over the assets during your lifetime. Depending on the type of trust, you may be able to receive income from the trust during your lifetime, and your heirs may receive some of the assets as well.

These are just a few examples of estate planning strategies that can help to reduce your estate tax liability. It’s important to consult with a qualified estate planning attorney or financial advisor to determine which strategies are best suited for your specific situation.

The Public Debate Over Estate Tax Rates

As noted earlier, estate tax is a controversial issue that has generated significant public debate in recent years. Supporters of the estate tax argue that it is a necessary tool for promoting greater economic equality and distributing wealth more fairly. Critics, on the other hand, argue that it is a form of double taxation that punishes success and discourages entrepreneurship.

One particularly contentious issue is the threshold for determining which estates are subject to the tax. Some argue that the current threshold of $11.7 million per person is too high and should be lowered. Others argue that the threshold should be eliminated altogether, meaning that all estates would be subject to the tax. There are also competing views on the appropriate tax rate, with some arguing that it should be higher to provide greater revenue for public services, while others argue that it should be eliminated entirely.


Estate tax rates are a complex issue that can have significant financial implications for high-net-worth individuals and their heirs. It’s important to stay informed about changes in the tax law and to work with qualified professionals to develop estate planning strategies that minimize tax liability and achieve your goals. While it’s unlikely that estate tax will ever be fully free from controversy, a better understanding of the issues can help to inform more productive public debates and policy decisions.

Estate tax rates vary depending on many factors. Although the estate tax and the inheritance tax are commonly referred to as the same thing, they are in fact technically different. The estate tax is imposed on the estate before any beneficiaries take control or ownership of their inheritance. Whereas an inheritance tax rate is the burden of the beneficiaries.

Inheritance tax rates vary in each state and can be effected by certain circumstances such as exemptions. Inheritance tax rates generally vary according to the type of property and the relationship between the beneficiary and the benefactor. Inheritance tax rates are finally applied after all intervening factors have been accounted for.

In general, inheritance taxes are applied as a percentage of the total value of inheritance. The inheritance tax rate also changes in a cyclical manner, the same way other tax rates change.  So, the inheritance tax rate that applies this tax year, could change the following tax year. In 2010, the inheritance tax expired. Essentially the Federal inheritance tax rate for 2010 is zero. However, inheritance tax rates can be applied to inheritance at a later date. Taxpayers are currently unable to estimate what their inheritance tax rate would be, because no determination has been made for those rates.

Previously, the Federal inheritance tax rates only applied after the estate surpassed a certain value. When the inheritance tax rates did apply, the rates would increase as the value of the estate increased. For example, a person that inherited less than forty thousand dollars in excess of the maximum  value threshold would be subject to an inheritance tax rate of twenty four percent of that excess. That would mean that the inheritance tax rate resulted in a tax of about eight thousand dollars on the amount inherited over the maximum exempt amount.

Those that inherited more than three million dollars above that maximum, would face an inheritance tax rate of fifty five percent. For the beneficiary that inherits over three million in excess, that inheritance tax rate could result in a tax of one and one half million dollars. In 2009 the amount exempt from the inheritance tax was three million and five hundred thousand dollars. In 2011 that exemption amount is set to be significantly reduced to one million dollars.

Inheritance tax rates are based on several factors.Each state has their own laws on inheritance tax and the rates in each state are likely to be very different. In addition, each state will allow for specific and unique deductions which can greatly alter the rate. The federal inheritance tax rates have expired but are set to change in 2011.

Those rates will likely be retroactive, which means they would be applied to those that inherited property in 2010. In order to pay the lowest inheritance tax rate, beneficiaries should be sure that they take all possible deductions before applying the tax to the value of the inheritance.