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Will I Owe Estate or Inheritance Tax When I Die?

mneEstate planning isn’t a common topic in pop culture, but John Oliver discussed the federal estate tax (the tax on a person’s wealth at his or her death) on last Sunday’s segment of Last Week Tonight (the estate tax commentary begins around 7:15—beware there is course language, only some of which is bleeped out). Many clients come to me with concerns about minimizing taxes at their deaths, so let’s answer a common question: to whom does the estate tax actually apply?

The federal estate tax only applies to the richest 0.14% of estates, so there is a good chance you are in the 99.86% of the population that the tax will not affect.  Under this year’s federal tax rules, your heirs will not pay tax on the first $5.34 million of your wealth. If you are married, this means you and your spouse can pass along $10.68 million of your wealth without giving a dime to the IRS. Any amount of wealth over the exemption amount is taxed at 40% at your death (but the tax can be avoided by giving assets to your surviving spouse or to charity). This amount that is exempt from estate tax is tied to inflation, so it is increasing every year. Basically, as John Oliver points out (in much more colorful language), if you don’t think the sum of everything you own is appropriately called an “estate” (think Downton Abbey for context), you likely don’t need to lose sleep over paying estate taxes.

In addition to the federal tax, some states impose estate or inheritance taxes of their own – find yours in this useful chart. In Illinois, you can pass along the first $4 million ($8 million for a married couple) of your wealth tax-free. Any amount over the exemption is taxed up to a maximum rate of 16%.

Several things to note: first, even if the estate tax does apply to you, talk to your estate planning attorney about techniques that can be used to reduce your estate tax bill at your death. Second, the exemption amount has become much more generous in recent years—in 2001, the amount exempt from the federal estate tax was only $675,000 per person.  In fact, the 2014 budget proposal proposes to decrease the estate tax exemption to $3.5 million and increase the tax rate to 45%. This may be a difficult provision to push through Congress, as a large portion of the American public favors repeal of the estate tax altogether even though it only applies to a small fraction of the population.

Remember that there are numerous other reasons to have an estate plan in place, so just because your assets won’t be subject to estate tax doesn’t mean you shouldn’t have an estate plan. And if the estate tax doesn’t apply to you, you can sleep easy knowing that, as John Oliver so eloquently puts it, you will avoid “the government literally taking your money over your dead body.”