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What are Estate Taxes?

by Jeffrey Asher, Estate Planning Expert
August 15, 2013

Question: What are estate taxes?

Answer:

Estate taxes, or what are sometimes called death taxes, or inheritance taxes, are generally owed and paid on the value of property in someone’s estate when they die. There is a federal estate tax and there are states that impose state estate taxes, although not every state has an estate tax. Some states don’t have an estate tax, but have an inheritance tax, which taxes the beneficiaries of the deceased person for the value of property inherited by them.  Some states, like New Jersey, have an estate tax and an inheritance tax. This means that New Jersey potentially taxes the estate of someone who has died (through the estate tax) and the beneficiaries of the deceased person for the value of property inherited by them (through the inheritance tax).

The estate tax (or the inheritance tax) is generally calculated on the date of death values of property owned by the decedent (or inherited by the beneficiaries), although that calculation may be affected by deductions, credits, and/or adjustments in valuation.

The federal government allows an exemption from the federal estate tax. Every US citizen is entitled to an estate and/or gift tax exemption of up to $5,250,000 (in 2013). That means a person can die with property valued at up to $5,250,000 (in 2013) and not pay federal estate taxes. Those states that have an estate tax generally have their own state-level exemption, or they accept what the federal government assumes the state-level exemption should be (called the state death tax deduction).  For example, New York State’s estate tax exemption is currently $1,000,000.  This means a person who has an estate worth $4,000,000 would not have a federal estate tax (because the estate is less than $5,250,000) but would have a New York State estate tax (because the estate is more than $1,000,000).  New Jersey’s estate tax exemption is currently $675,000.  There is no exemption from the New Jersey inheritance tax, but certain classes of beneficiaries (such as, spouse and children) are exempt. North Carolina, for example, has a state estate tax, but the exemption mirrors the federal exemption. The federal exemption of $5,250,000, currently, is a lifetime exemption that can be used during life or at death. In other words, a US citizen may make gifts during life of up to $5,250,000, currently, without paying federal gift tax.  However, having used the exemption during life there will be nothing left of the exemption at death. Connecticut is the only state that has a gift tax.

The federal estate tax return is due nine months following the person’s death, although extensions may be applied for.  However, an extension of time to file the return does not mean also an extension of time to pay the estate tax.  Penalties and interest will be owed on the unpaid amount of federal estate taxes.  States’ estate tax and inheritance tax returns have their own deadlines. For example, the deadline to file a New York State estate tax return is nine months, unless extended.  The deadline to file a New Jersey estate tax return is also nine months, but the deadline to file a New Jersey inheritance tax return is only 8 months.  The deadline to file a Connecticut estate tax return is six months, unless extended.

As you can see, the road to navigate between and amongst the federal estate tax, state estate taxes, state inheritance taxes, gift taxes, filing deadlines, etc., is a winding and bumpy one. It is best to seek out a qualified Trusts and Estates Attorney to help you steer the course.”

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Jeffrey Asher is a prominent Trusts & Estates and Elder Law attorney in Westchester County and New York City. Mr. Asher concentrates primarily in the areas of Estate Planning, Probate and Estate Administration, Elder Law, Medicaid Planning, and Special Needs Planning. Mr. Asher provides comprehensive legal services, tailored to meet your specific needs.

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