The answer to this question will largely depend upon the size of your estate when you pass, who you leave your assets to and the type of assets you leave behind.
Though the information below is general and applies to most clients’ estate, it is not an exhaustive list of taxes that could be due in every situation.
The first type of tax is the estate tax. Generally, if the value of the assets you own at death are greater than what the federal estate tax exemption is in the year you pass, there will be a 40% estate tax on the amount over the exemption amount. Right now, the 2022 exemption federally is $12,060,000 for each US person (the amount each US person can pass to others). The exemption is presently indexed for inflation under the current law and will be $12,920,000 in 2023. The current tax law for the estate tax will sunset at the end of 2025 without further legislation and will be $5,490,000 in 2026 but will include an added inflationary index.
If you gift assets to others during your lifetime beyond the annual gift tax exclusion amount (presently $16,000 in 2022 and set to increase to $17,000 in 2023), that amount will reduce the amount that will be excluded from the estate tax when you pass. For example, if you gift $2,000,000 during your lifetime to your children and the estate tax exemption is $6,000,000 when you die, you would be left with $4,000,000 that you could pass at death that would not be subject to estate taxes.
The who you leave your assets to can also affect whether or not any taxes are due upon your death. For example, if you leave assets to your spouse, generally those assets are not subject to estate taxes due to the marital deduction. But those assets could be subject to estate taxes when the spouse dies if they are added to the spouse’s own assets and make their estate larger than their exemption when they die.
Also, if you leave assets to a 501(c)(3) charity, they do not pay taxes on property given to them. For example, if you owned $10,000,000 in assets but only had a $6,000,000 exemption at death and you bequeathed $4,000,000 of the assets to the American Cancer Society in your trust, you would not have an estate tax. The $6,000,000 exemption would only be applied to the non-charitable bequests.
Lastly, the types of assets left to others can also affect whether or not any taxes will be due. For example, assets such as real estate, business interests and stock (or brokerage funds) are assets that are subject to capital gains when sold. Generally, assets left to others receive a step-up in cost basis when they are inherited. However, if the value of those assets rises between when inherited with the stepped-up cost basis and the sale date, a capital gains tax will be due.
If the assets inherited are retirement accounts such as IRAs, 401Ks, 403(b)s, etc., if they are not Roth accounts, when assets are withdraw/distributed from these accounts, they will be subject to income taxes.If you need help reviewing your existing estate plan or establishing an estate plan, reach out to us at (760) 448-2220.