Are Gen Z's Ready for Estate Tax?
Despite the pandemic, many Gen Z graduates are establishing their financial futures with strong financial literacy from podcasts and online platforms. They’re maximizing their 401K plans and IRAs, then turning attention to their parents’ financial planning to ensure optimal tax savings on inheritances.
Understanding Estate Tax
The estate tax, often called “the death tax,” differs fundamentally from income tax. While income tax is an annual tax on yearly earnings, the estate tax is a one-time tax on a person’s assets following their death, due within nine months if certain monetary thresholds are met. Two types exist: state and federal.
Spousal Transfers
When a spouse dies and leaves everything to the surviving spouse, typically no estate tax is due, though returns must be filed. The government doesn’t want surviving spouses to become state dependents. The surviving spouse accesses funds for living expenses, then estate taxes are paid after both spouses die and before assets distribute to children.
Gifting Strategy
One tax-saving approach involves establishing a gifting program. Any person can gift up to $15,000 annually to another person without tax consequences. A husband with two children could gift $15,000 to each child, while his spouse does the same—transferring $60,000 yearly to the next generation tax-free.
Federal and State Taxes
In 2021, federal estate tax applies to estates with assets at or exceeding $11,700,000. However, in 2026 the exemption drops to approximately $5 million (adjusted yearly for inflation). The federal estate tax rate is 40%.
Texas has no estate tax. Other states vary significantly: Washington and Hawaii reach 20%, while Massachusetts, New York, Minnesota, Oregon, Illinois, Rhode Island, Maryland, Vermont, and Washington D.C. charge 16%. Connecticut and Maine impose 12%. Each state with estate taxes maintains different exemption levels.
Consulting an experienced estate planning attorney is essential for understanding how these provisions apply to your specific situation. Contact our office to schedule a consultation.
