2015 Estate Tax Rates: How Much Will You Pay?

Source: 401kcalculator.org via Flickr.

The estate tax draws heated debate between advocates and opponents, with some referring to the levy as a "death tax" while others argue that the estate tax is a key vehicle in fighting economic inequality over the generations. Regardless of what you think of the estate tax, though, the estate tax rates are still extremely high compared to many other types of taxes. That can be devastating to some families, but it also creates a big incentive to plan ways to avoid it. Let's take a look at the estate tax rates for 2015 and briefly discuss some tactics you can use to reduce your estate tax bill.

Estate tax rates for 2015
The rate structure for the estate tax has remained largely unchanged since 2013. A look at the various rates reveals what appears at first glance to be a complicated structure involving 13 different brackets:

Source: IRS.

This table makes it look as though calculating your estate tax could be a mathematical nightmare. However, there's a simplifying factor that makes this much easier.

The tax laws grant an estate tax exemption for estates that are smaller than a certain amount. Set at $5 million for 2010 and adjusted for inflation since then, the so-called lifetime exemption amount defines how much wealth each person can pass to any heir they choose without owing any estate tax. For 2015, the lifetime exemption amount is $5.43 million.

The way the exemption is treated, though, is different from a standard deduction. Instead, the way the tax laws implement the exemption is to have you include all your taxable estate assets, but then give you a credit that effectively zeros out the tax impact of the first $5.43 million. Since the brackets only go up to $1 million, anyone who has a taxable estate tax will pay the maximum rate of 40% on whatever portion of their estate goes over the $5.43 million amount.

An example can help make this clearer. If you have a taxable estate of $5.44 million, then your estate tax calculated under the chart above would be $2,121,800. However, the lifetime exemption takes the form of a unified estate tax credit of $2,117,800, which you can use to reduce your estate tax. That leaves $4,000 in net tax liability, which is equal to 40% of the $10,000 in the estate above the lifetime exemption amount.

The easiest way to avoid high estate tax rates
Most people don't like the idea of turning over any of their hard-earned money to the IRS, let alone as much as 40%. Fortunately, there are several ways to reduce or even eliminate your eventual estate tax liability.

First, you can make gifts during your lifetime that will result in your having fewer assets at your death. Under the gift tax rules, you can give anyone up to $14,000 annually without having to pay any gift tax. Go over that amount, and you'll end up using up some of your lifetime exemption, defeating the purpose. However, larger gifts made directly to educational or medical institutions for tuition or healthcare costs don't trigger gift-tax liability.

Second, many gifts are eligible for deductions against the estate tax. For most people, either leaving money to a spouse or giving it to charity will reduce your taxable estate.

Finally, there are many more-complicated methods of giving money to potential heirs during your lifetime that can reduce your eventual estate tax bill. Many of them are controversial and they can be expensive to implement, so it's important to have an estate-planning attorney available to backstop your plan. In many cases, simply by structuring your financial affairs slightly differently and by being willing to give up some money during your lifetime, you can dramatically reduce your estate tax bill.

No one likes to pay taxes, and high estate tax rates make it even more appealing to avoid them. With some planning, even the rich can find ways to pay less in estate taxes.