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Estate Tax Planning

An estate tax is a tax on property transferred after your death. The amount of taxes levied is based on the fair market value of all the assets in your estate, plus the value of assets transferred within a year before your death, plus the value of assets over which you had a general power of appointment, even if you did not own them, plus the value of property in which you retained a life estate or the right to income, plus . . .  well, you get the idea . . . it's complicated. Estate tax planning involves using legal strategies to reduce the estate taxes owed from your estate to maximize the assets transferred to beneficiaries.

Importance of Estate Tax Planning

Estate tax planning is an important part of a comprehensive estate plan. Understanding exemptions can help you manage your wealth accordingly and save money on estate taxes. Careful estate tax planning can help preserve the assets that are transferred to your heirs upon your death.

Who is Responsible for Filing Estate Taxes?

Some transfer taxes, such as the annual gift tax, must be paid by you after you file your tax return each year unless you elect to apply the amount owed to your total lifetime gift tax exemption. 

If estate taxes are owed after your death, the executor named in your will must file a tax return within nine months of your death. If any taxes must be paid, they will begin accruing interest if not paid by the due date.

Benefits of Estate Tax Planning

Understanding how the federal tax system works when it comes to estate and gift taxes will help you accomplish the following:

  • Allocating resources, like trust transfers and gifts, in such a way as to avoid paying estate or gift taxes.
  • Knowing when a transfer will be taxed, so you can plan your estate accordingly.
  • Understanding how the total amount of resources in your estate are valued.
  • Preserving wealth your heirs will inherit upon your death.
  • Preserving wealth that future generations, such as grandchildren, will inherit upon your death.
  • Understanding how to claim the tax exemptions of a deceased spouse because failing to follow the correct procedures can result in losing this important tax exemption.

Types of Tax Exemptions

There are three important taxes in the federal tax system, which together are called the Unified Transfer Tax:

  1. Estate Taxes,
  2. Gift Taxes, and
  3. Generation-Skipping Transfer Taxes. 

The Tax Cuts and Jobs Act signed into law in 2017 doubled the total amount of exemptions for estate taxes, lifetime gift taxes, and generation-skipping transfer taxes and indexed the annual amount for inflation. The amount will revert back to 2016 levels if Congress does not elect to continue the changes in 2026.

Federal Estate Tax Exemption

The federal estate tax exemption increased under the Tax Cuts and Jobs Act from $5 million to $10 million, as indexed for inflation. In 2020, the exemption is $11.58 million per person due to inflation indexing, or $23.16 million for a married couple, as long as the correct procedures to claim this important exemption are followed. Unless the current tax law is extended with a new bill, however, in 2026 the tax changes will revert back to 2016 rules.

Annual Gift Tax Exclusion

The Internal Revenue Service imposes a tax on gifts given to other individuals, but only if the value of the gifts to an individual in a calendar year exceed a certain amount. If the total value of the gifts to any one individual exceed this amount, taxes must be paid on the excess amount. The giver of the gift rather than the recipient is responsible for paying taxes on the value of the excess amount.

The excludable amount has gradually increased over the years due to inflation from $10,000 in 1997 (when the federal gift tax was indexed for inflation) to $16,000 in 2022.  Married couples can effectively double their gifts to $32,000 per donee per year.  This amount applies to the total value of gifts given to any one individual, not to the total amount of gifts given annually. 

Lifetime Gift Tax Exemption

The lifetime gift tax exemption allows those who have gifted more than the allowable amount to apply the excess to their lifetime estate and gift tax exemption. The person who gave the gift must still file a tax return disclosing the amount of the gift but will not be required to pay taxes on it that year. This individual must indicate on the tax return that he or she intends to apply the amount toward the lifetime estate and gift tax exemption.

The unified lifetime estate and gift tax exemption is $12,060,000 in 2022. "Unified" means that if a person gave taxable gifts totaling, say, $1,060,000 during his lifetime, his remaining estate tax exemption if he died in 2022 would be $11 million ($12,060,000 million less $1,060,000). Many people will not exceed this amount,  but the estate of a person who dies with considerable wealth could be taxed at the top federal rate of 40 percent.

Generation-Skipping Transfer Tax

The generation-skipping transfer tax imposes a tax on both gifts and transfers in trust to unrelated individuals who are more than 37.5 years younger than the donor or to related persons who are more than one generation younger than the donor (e.g., grandchildren). This tax is only incurred if the transfer or gift tax is not paid at the generation level.

For example, if a trust is created for the benefit of a child and will distribute any property to surviving grandchildren after the child's death, the generation-skipping transfer tax will only be incurred if an estate tax is not paid by the child's estate.

The generation-skipping transfer tax exemption is $12,060,000 in 2022 as indexed for inflation, the same amount as the federal estate tax exemption. However, this tax is in addition to the estate and gift tax. This amount was doubled and indexed for inflation by the Tax Cuts and Jobs Act and will revert back to a $5 million exemption (indexed for inflation) unless Congress elects to continue it in 2026.


Portability means that a surviving spouse may inherit the unused estate and gift tax exemption of a deceased spouse. There are strict requirements for claiming this tax exemption. A surviving spouse must file a Form 709 Estate Tax Return within nine months of the spouse's death, or the surviving spouse may be barred from using portability to claim the deceased spouse's exemptions.

Alaska Estate Taxes

Alaska's estate tax system is commonly referred to as a “pick up” tax. This is because Alaska picks up all or a portion of the credit for state death taxes allowed on the federal estate tax return (federal form 706 or 706NA). Since there is no longer a federal credit for state estate taxes on the federal estate tax return, there is no longer basis for the Alaska estate tax. Alaska has neither an estate tax – a tax paid by the estate, nor an inheritance tax – a tax paid by a recipient of a gift from an estate.

Arizona Estate Taxes

Arizona "permanently" repealed its estate tax in 2006.

California Estate Taxes

California's estate tax system is commonly referred to as a “pick up” tax. This is because California picks up all or a portion of the credit for state death taxes allowed on the federal estate tax return (federal form 706 or 706NA). Since there is no longer a federal credit for state estate taxes on the federal estate tax return, there is no longer basis for the California estate tax. California has neither an estate tax – a tax paid by the estate, nor an inheritance tax – a tax paid by a recipient of a gift from an estate.

Oregon Estate Taxes

Oregon imposes an estate transfer tax when assets are transferred from the estate to heirs and beneficiaries. The tax return and payment are due nine months after the estate owner's date of death.

Filing is required if the total value of all estate assets was $1,000,000 or more when the decedent died and the decedent was either an Oregon resident or a non-resident that owned property in Oregon when he or she died.

The first $1 million of estate value is exempt. Above $1 million, the tax rate is progressive, starting at 10% and working its way up to 16% for amounts over $9.5 million.

Tennessee Estate Taxes

Tennessee once had its own state tax exemption but that was abolished in 2016. The tax still applies to any deaths that occurred prior to 2016 with a personal tax exemption of up to $5 million. The Tennessee estate tax was called an inheritance tax, but really, it operated more like an estate tax because it was based on the total value of the estate. State estate taxes are separate from the federal tax system.

Consult an Experienced Estate Planning Attorney

The rules for estate taxes are complex and subject to frequent change. Speaking with an estate planning attorney can help you develop a plan to maximize the value of your estate and save money on annual taxes.

If you have questions about estate tax planning and need legal advice contact attorney Nina Whitehurst at Cumberland Legacy Law by calling (931) 250-4820 or fill out our online form.


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