Please ensure Javascript is enabled for purposes of website accessibility

Estate Tax: What You Need to Know

By Motley Fool Staff – Nov 10, 2016 at 6:40AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Find out what you should know about the estate tax.

The estate tax is a much-hated provision of the tax laws, but many people don't realize how it actually works.

In this clip from Industry Focus: Financials, Motley Fool analyst Gaby Lapera and Dan Caplinger, the Fool's director of investment planning, examine the estate tax, including the lifetime exemption of $5.45 million that effectively restricts estate taxation to a small number of people. Yet as Dan points out, some states have lower limits, and that can leave you vulnerable to estate tax at the state level even if the IRS wouldn't think twice about collecting from you. It's important to take the estate tax into account when doing your own planning.

A full transcript follows the video.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

This podcast was recorded on Sept. 22, 2016 for the Oct. 31, 2016 episode.

Gaby Lapera: Let's move on to estate taxes. This is something that happens after you die, obviously, and your estate gets passed on to someone. I think most people have this conception that everyone gets charged an estate tax, and you're going to lose half the value of whatever gets passed on to you. That's not true at the federal level. Estate taxes only apply on the part of the estate that exceeds $5.45 million, which is, for most people, a lot of money.

Dan Caplinger: That's right. A lot of people pay a lot of attention to the 40% rate, which is very high. It's higher than any of the income tax brackets that are out there. But you're right, you have what's known as the lifetime exemption amount that covers not just what's in your state when you pass away but also taxable gifts that you make during your lifetime. You can give up to a total of $5.45 million to heirs, either during your lifetime or in your estate when you pass away, without having to pay any estate taxes at all. And that doesn't even include a lot of the exemptions that are available for estate tax. For instance, you can give an unlimited amount to your spouse, and you won't have to pay any estate taxes on that. There are other exemptions. If you make a gift of money that goes toward someone's educational expenses, as long as that gift is made directly to the educational institution, that qualifies for an exemption. There are all kinds of these exemptions that can add up. Even if you do have a large enough estate that you have to worry about that amount, there are still techniques that you can use either to reduce your estate tax or eliminate it entirely at the federal level.

Lapera: And the other thing to think about is that, although this probably won't apply to you from the federal level -- though it might -- some states have not increased their estate tax level in the same way the federal government has. Currently, there are 14 states that have estate taxes, plus D.C., and most have far lower thresholds than the federal estate tax. New Jersey is the lowest, at $675,000. But then, there's other states like Maryland and New York that currently have estate taxes thresholds that are lower than the federal government, but they're working to raise theirs until it's on par with the federal government. So, if you live in one of those 14 states, you might want to take that into account when you're crafting your post-death what-to-do documents.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.