I often get calls and emails from Texans concerned about the amount of federal estate taxes that will be owed after their death. They worry that their estates won’t be liquid enough to pay those taxes and that their families will have to sell property to satisfy the estate’s tax liability.
The vast majority of those who contact me have nothing to worry about.
The estate tax is probably the most hated tax in the country, perhaps because many people believe that everybody who dies will be affected by it. This is not the case. Although every U.S. citizen is subject to the estate tax, the vast majority will never have to pay any taxes at all because a certain amount of a person’s estate is exempt from taxation.
The federal estate tax is a tax imposed on the transfer of a “taxable estate” to a decedent’s heirs and beneficiaries. The “taxable estate” is calculated by deducting funeral costs, debts, and assets transferred to a spouse from the fair market value of all assets, including life insurance, in which the decedent had interest at the time of death.
The American Taxpayer Relief Act of 2012 sets the estate tax rate at 40 percent for individual estates valued at over $5 million, indexed for inflation. Additionally, married couples can effectively pass double that to their heirs because the law allows a surviving spouse to claim the deceased spouse’s unused tax exemption and add to the survivor’s exemptions when the surviving spouse later dies.
Estate tax is only due for amounts that exceed the exemption amount. This means that individuals can pass up to $5 million to their heirs ($10 million for couples) without any estate tax liability whatsoever.
At this rate, over 99.8 percent of individuals won’t have any estate tax liability.