Many people in Virginia may have heard of the federal estate tax, but may not be entirely sure what it is or if it even applies to them. In fact, under current law most estates do not wind up being taxed when a person dies. And, for those who would pay an estate tax, this obligation may be repealed by 2024 if certain pieces of legislation are passed.
Currently, the estate tax essentially taxes a person's right to bequeath their assets when they pass away. A person's assets -- including all money, real property, insurance policies, business interests, trusts and any other valuable items -- are added up, in order to calculate the total amount of the person's gross estate. Deductions, such as those for assets transferred to a spouse or charity, a mortgage and other items -- will then be taken from this amount. After that, the total value of taxable gifts a person made while alive is added in. The final total is what is considered to be the person's taxable estate.
If a person's taxable estate is above a certain level, they will be responsible for paying estate taxes. But, if their taxable estate is below that level, it will not be taxed. This year, the estate tax only applies to estates worth at least $5.49 million. Next year that number will go up to $5.6 million. This means that very few people actually pay the estate tax. In fact, the Tax Policy Center reports that only 5,460 of those who passed away in 2017 ultimately ended up having to pay the estate tax.
Some politicians argue that the estate tax harms small business owners and farmers who may have sizeable estates on paper, but actually have very little in the way of liquid cash. Thus, if they are forced to pay the estate tax, they might actually end up having to sell the very business or farm that comprises their estate in order to do so. However, the Tax Policy Center reports that small business owners and farmers only comprised one percent of all those who had to pay estate taxes.
No matter where a person falls politically on the issue of the estate tax, it is still worthwhile to have a solid understanding of where the law currently stands. An attorney may be able to provide assistance to those in Virginia who have questions about this and other estate planning issues.
Source: USA Today, "Estate planning: What is the 'death tax,' and who pays it?" Christy Bieber, Nov. 17, 2017