Gift & Estate Tax FAQs

No, in fact, very few families have to pay the estate tax. There is an estate tax exclusion that can be used to transfer a certain amount tax-free. The portion of an estate that exceeds this amount would potentially be subject to the estate tax and its 40 percent maximum rate.

For 2023, the exclusion is over $12.92 million, but it can be changed via legislative mandate.

There is a marital deduction that gives you the ability to transfer unlimited assets to your spouse tax-free, but there is one stipulation. In order to use this marital deduction, your spouse must be a citizen of the United States.

There are a number of states in the union that have state-level estate taxes. Fortunately, we do not have an estate tax here in the Golden State.

However, if you own property in a state with an estate tax, their tax could be a factor if the value of the property exceeds the exclusion in that state. The state-level exclusions are typically much lower than the federal exclusion.

For example, there is an estate tax in Hawaii, and the exclusion is about half of the federal exclusion.

Speaking of state-level transfer taxes, there are six states that have inheritance taxes. Unlike an estate tax, an inheritance tax can be imposed on transfers to each individual nonexempt inheritor when one estate is being administered.

California is not one of these six states, but once again, if you inherit property that is located in a state with inheritance tax it could be a factor for you.

There is rarely any good news to share about taxation, because the tax man is pretty active, but this is an exception. You do not have to claim an inheritance on your state and local income tax returns, and this applies to insurance policy proceeds and direct inheritances.

When it comes to individual retirement accounts, it depends on the type of account. A traditional account beneficiary would have to report the income, but distributions from a Roth IRA are tax-free.

You would get a step-up in basis, so you would not be responsible for gains that took place during the life of the decedent.

The estate tax was originally implemented in 1916, and there was no gift tax then. People took advantage of the loophole, but it was closed when the gift tax was enacted in 1924. It was repealed two years later, but it was reenacted in 1932.

We have had a gift tax since then, and it is unified with the estate tax. The lifetime exclusion is a unified exclusion that encompasses lifetime gifts along with an estate.

However, there is an additional annual gift tax exclusion that sits apart from the unified gift and estate tax exclusion. This exemption can be utilized to transfer as much is $16,000 to an unlimited number of gift recipients each year tax-free.

It is allotted to each taxpayer, so a married couple could give $32,000 to any number of people annually. The utilization of this annual exclusion over an extended period of time can be part of an estate tax efficiency strategy.