If you want to save taxes at your death, you need to keep in mind both the federal and state estate tax exemption.
Federal Estate Tax Exemption
The estate tax is a tax on the value of property transferred at death. Property includes real estate, life insurance, retirement plans, investments and tangible personal property such as cars, jewelry and artwork. The federal estate tax exemption for 2017 is $5,490,000. Thus, if an estate is worth less than that amount, no federal estate tax will be due. The federal estate tax rate is 40% of the amount above the estate tax exclusion. For instance, if your estate is worth 8 million dollars, you pay 40 percent on the value above $5.49 million (i.e. - $2.51 million). Your estate tax would be $1.004 million dollars calculated as follows: $2,500,000 x 40% = $1,004,000.
While that is a lot of money, there are things you can do to reduce your estate tax liability. Assuming your spouse is a U.S. citizen, you can leave to your spouse your assets tax free because of the unlimited marital deduction. A non-U.S. citizen spouse does not qualify for the unlimited marital deduction. But, by creating a special trust called a "qualified domestic trust" or QDOT, he or she can inherit, free of estate tax.
The federal government also recognizes the “portability” of each spouse’s estate tax exemption. Each spouse has his or her own estate tax exemption and can use a predeceased spouse’s unused estate tax exemption. Utilizing portability, couples can now have assets worth $10,980,000 without owing any federal estate tax. However, a surviving spouse, who remarries, will lose the prior deceased spouse’s exemption.
Many of our clients ask what the Trump Administration will propose regarding estate taxes. Will Trump’s campaign proposal to eliminate the estate tax occur? To replace the revenue loss, President Trump suggested imposing a capital gains tax on assets when estate beneficiaries sell them. Family farms and small business owners with less than $10 million in assets would receive an exemption. As of early March, the Administration has not proposed any legislation to repeal the estate tax. And, President Trump did not mention the estate tax in his State of the Union address. Consequently, we continue to plan based on the law as it stands.
Connecticut Estate Tax
Connecticut is one of only 15 states that have an estate tax. Fortunately, it’s estate tax exclusion is relatively high and remains at $2,000,000 for 2017. Depending on the amount above the estate tax exemption, the Connecticut estate tax rate ranges from 7% to 12%. Each spouse has his or her own estate tax exemption which means you can jointly own up to 4 million dollars of assets before you pay Connecticut estate tax.
Unlike the federal estate tax, however, there is no portability in Connecticut. The only way for a couple to use their entire $4,000,000 estate tax exemption is by having an estate tax saving trust called a Credit Shelter Trust. A Credit Shelter Trust enables a couple to remove up to $2,000,000 from the estate of the surviving spouse.
You can avoid some or all of the estate tax by giving your property away during your life. There is a gift tax, however, on gifts above the lifetime gift tax exclusion ($5,490,000 federal exclusion; $2,000,000 Connecticut exclusion).