Death Taxes in 2025: Understanding Costs, Thresholds, and How to Minimize Them

What Are Death Taxes?

Death taxes, commonly known as estate taxes, are levied by the federal government and certain states on the value of a deceased person's estate before assets are transferred to beneficiaries. In 2023, estates valued above $12.92 million are subject to federal death taxes, increasing to $13.61 million in 2024. These taxes can also be referred to as inheritance taxes or death duties, depending on the jurisdiction and who is responsible for paying.

Key Points to Know

• Death taxes apply to the transfer of wealth after death and impact estates exceeding federal thresholds.
• Federal estate tax rates range from 18% to 40% based on the taxable amount.
• Several states impose additional estate or inheritance taxes beyond federal requirements.

Understanding How Death Taxes Work

The term “death tax” often describes both estate and inheritance taxes. Estate taxes are paid by the deceased’s estate before distribution, while inheritance taxes are paid by the recipients of the inheritance. The federal estate tax applies only to estates exceeding the exemption limit, which is $13.61 million in 2024. Some states like Connecticut, New York, and Washington also impose their own estate taxes, while states such as Iowa and Pennsylvania levy inheritance taxes.

Thresholds and Important Details

Thanks to the Tax Cuts and Jobs Act of 2017, the federal estate tax exemption is currently high, shielding most estates from taxation. However, this law expires in 2025, potentially lowering exemption amounts to pre-2017 levels. For example, if an estate is worth $13 million in 2023, only the amount exceeding $12.92 million ($80,000) is taxable, resulting in a calculated tax based on the unified rate schedule.

Unified Tax Credit Explained

The unified tax credit combines the exemption for estate and gift taxes, allowing individuals to gift or bequeath assets up to the exemption limit without incurring tax liability. This credit reduces the overall tax owed dollar for dollar on transfers above the threshold.

Unlimited Marital Deduction

This provision permits unlimited tax-free transfers of assets between spouses, deferring estate taxes until the death of the surviving spouse. This strategy helps married couples minimize immediate tax burdens.

Pros and Cons of Death Taxes

Advantages

• Only estates with very high values are affected due to the high exemption limits.
• Death taxes generate substantial government revenue, with billions collected annually.

Disadvantages

• Potential double taxation occurs when income and estate taxes apply to the same assets.
• Complex laws create opportunities for avoidance, which may reduce fairness.

Strategies to Reduce or Avoid Death Taxes

Most individuals will never pay death taxes due to the high exemption thresholds. For those with significant assets, effective methods include:

• Establishing irrevocable trusts such as Grantor Retained Annuity Trusts (GRATs) to shield assets.
• Making lifetime gifts within exemption limits to reduce estate size.
• Donating to charitable organizations to gain deductions and lower taxable estate value.
• Using the unlimited marital deduction to transfer assets tax-free between spouses.

Common Questions

How Can You Legally Avoid Death Taxes?

By gifting assets during your lifetime, establishing trusts, and making charitable contributions, you can significantly reduce your estate’s taxable value and avoid death taxes.

Which States Impose Death Taxes?

States with estate taxes include Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia. States with inheritance taxes include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Estate Tax vs. Inheritance Tax

Estate tax is paid by the deceased’s estate before distribution, whereas inheritance tax is paid by the beneficiaries upon receiving their inheritance.

The Bottom Line

Death taxes apply to estates with significant value, currently above $13.61 million in 2024. While most people are unaffected, understanding the rules and planning ahead can help minimize or avoid these taxes entirely. Utilizing strategies such as trusts, gifting, and charitable donations can protect your legacy and reduce tax liabilities.

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