Recent Changes to Estate Tax Law (What's New for 2023)
During the celebration President Trump announced that, “We have provided, for the most part, estate taxes wiped.”
Trump also stated that the new tax plan would prevent business owner’s from selling their businesses at “bargain-basement numbers” to reduce tax liability, and protect generational farmers and their family-owned farms.
In this article we've explained the recent changes to estate tax law and how these changes may help you financially. We've also explained the history of estate taxes and further outlined some of the changes that are likely to impact estate tax laws until 2026.
Quick Article Guide
Here’s what we'll cover in this post:
What is an Estate Tax?
Estate taxes are taxes that get levied against the assets you leave behind for your loved one’s when you pass away. Most estate taxes are collected by the IRS; however, some states also collect their own estate taxes.
Federal estate taxes, or “death taxes,” were first collected in the United States from 1797 to 1802 to finance the cost of the Revolutionary War. Over the next 100 years they were repealed and reinstated by congress to finance wars until the Revenue Act of 1916 passed.
Since 1917, some form of estate tax has been collected by the IRS every year, except 2010. In 2010, estate taxes we’re briefly repealed due to the tax cuts initiated by the Bush administration in 2001, but they were quickly replaced by Congress in 2011.
What is the Estate Tax Exemption?
In December of 2017, the Tax Cuts and Jobs Act was passed by Congress in an effort to help boost the economy. This act went into effect on January 1, 2018, and as a result of its passing, the existing federal estate tax exemption increased from $5,490,000 to $11,180,000 per individual.
In 2023, the federal estate tax exemption increased again to adjust for inflation. On January 1, it reached an all-time high of $12,920,00 per individual. Married couples also saw the a slight adjustment from $24,120,000 to $25,840,000.
These exemptions are scheduled increase annually until they peak in 2025. Unless new legislation is passed, the current federal estate tax exemption will reduce to just over $6 million dollars on January 1, 2026. Even with a Republican-controlled House, it's unlikely for this timeline to change.
In September 2021, the Democrat-controlled House of Representatives proposed cutting the estate tax exemption in half to roughly $6,000,000 for 2022, but this Bill did not get enough votes to pass. We suspect a Bill proposing just the opposite would also fail to gather the support needed as estate taxes impact less than 1% of Americans.
How the Federal Estate Tax Exemption Works
If the gross value of your estate is less than the estate tax exemption (single or married) when you pass away, your loved one’s will avoid federal estate taxes. If you're single, you can leave the full value of your estate to whomever you choose, and they won’t owe the IRS a penny.
If you’re married you can also leave your full estate to your spouse untaxed. Under current law, this will double your estate’s federal exemption. The larger exemption will decrease your tax liability when your spouse passes away and leaves the assets behind.
If the value of your estate exceeds the estate tax exemption when you pass away, your heirs will owe on the assets you intend to leave behind for them. These taxes are due within 9 months of your passing and owing them can create a substantial burden for your loved ones.
Oftentimes, surviving family members are forced to liquidate the assets that were left to them for a fraction of their value. This prevents the IRS from charging additional fees and penalties, or attempting to seize assets.
Below we've provided an illustration of how estate taxes will be calculated for someone who passed away in 2023. In the example below, we've assumed that the applicant's estate has a gross value (property, jewelry, collectibles, savings, etc.) of $15,000,000 and they are unmarried.
In the example, the tax liability for this estate is a fraction of what it would have been a year ago, but a substantial tax liability remains. Depending on the size of your estate, you may also want to consider the potential growth of your investments or assets overtime, state estate taxes, and any changes in legislation that could decrease the estate tax exemption prior to 2026.
On another note, if you already have an irrevocable trust in place to settle or reduce your estate taxes at the time of your death, it may be time to revisit the terms of your trust with an attorney. If you happen to pass way in the next seven years, your trust may be substantially over-funded.
Does Your State Have an Estate Tax?
In addition to federal estate taxes, some states also impose estate taxes on their resident’s assets when they pass away. In states like Washington, these tax rates are as high as 20%, but paying an estate tax to your home state will reduce your federal estate tax liability.
As an example, New York state is home to the second-highest estate tax rates in the nation, 16%. However, once you consider the federal tax deductions provided by paying the state taxes, the effective tax rate levied by New York ends up being closer to 9%.
States that Collect an Estate Tax
|State||Exemption Per Individual||Estate Tax Rate|
|District of Columbia||$4,594,000||8% to 12%|
|Hawaii||$5,490,000||10% to 15.7%|
|Illinois||$4,000,000||0.8% to 16%|
|Maine||$6,410,000||8% to 12%|
|Maryland||$5,000,000||0.8% to 12%|
|Massachusetts||$1,000,000||0.8% to 16%|
|Minnesota||$3,000,000||10% to 16%|
|New York||$6,580,000||3.06% to 16%|
|Oregon||$1,000,000||10% to 16%|
|Rhode Island||$1,733,264||0.8% to 16%|
|Washington||$2,193,000||10% to 20%|
Traditionally, the District of Columbia, Hawaii, and Maine have matched the federal estate tax exemption. However in 2018, all three states broke the trend. Currently, the Hawaii's exemption is set at $5,490,000 per individual, $4.594 million in DC, and $6.41 million in Maine.
Like federal estate taxes, each state’s estate tax laws are also subject to change at any time. We always recommend speaking with a tax attorney before beginning your estate planning.
What's the Future of Estate Taxes?
The future of estate taxes is uncertain to say the least. In 2018, Connecticut announced their plans to match the federal estate exemption by 2020. However the state reversed course only a few months later. New Jersey repealed their estate taxes in 2018 as did Tennessee in 2015, and Indiana in 2013.
While some states have repealed their estate taxes in recent years, other states may introduce estate or inheritance taxes in the upcoming years. One example of this is the state of California. In 2019, Senator Weiner introduced an estate tax bill for individuals worth more than $3.5 million. In addition, the federal estate tax brackets could change at anytime in the near future.
Historically, it’s important to note that estate taxes have been documented in most of our country’s history, Ancient Egypt, Rome, and throughout Feudal Europe. With that being said; we don’t expect that estate taxes will ever be eliminated, even if they are reduced for a few years by our current legislation.
How to Avoid or Reduce Estate Taxes
Most tax attorneys, financial advisors, and banks recommend reducing your estate tax liability by creating an irrevocable life insurance trust or ILIT. An ILIT allows you to own life insurance (an asset in the eyes of the IRS) without increasing your estate tax liability.
When you create an ILIT you separate the value of the assets your trust owns from the value of your estate. The downside is that the trust be IRREVOCABLE. A revocable trust is easily modified, and it will be viewed as a personal asset. An irrevocable trust is managed by a trustee, and cannot be modified.
To avoid taxes, your ILIT must purchase a permanent life insurance policy on your life. Your trustee will then coordinate payments with your insurance provider to make sure your policy stays active. When you pass away, your policy's death benefit will be paid directly to your trust.
This money will then be paid to the IRS, settling your estate's tax obligation. You can appoint anyone you want as your trustee, and they must act in accordance to the terms of the trust. You cannot pay your own life insurance premiums, they must be funded by your trust.
This is done by contributing up to the amount of the annual gift exclusion (currently $17,000 per individual) to avoid tax consequences. When you pass away, your life insurance will pay your trust, and your trustee will pay the IRS to settle your estate's tax obligation. A trustee can be an attorney, a bank executive, or a family member.
Estate Planning for the Future
If your estate is large enough, your heirs owe the IRS when you pass away, but how do you prepare for the future without knowing what your estate tax liability will be? Chances are, if you’re healthy enough to read this article, you’ll likely be alive in 2026 when the estate tax exemptions revert to back to where they were in 2017.
The American Taxpayer Relief Act of 2012 established a permanent exemption of $5,000,000 with an adjustment for inflation and a maximum estate tax rate of 40%. Based on the figures when can assume that the estate tax exemption in 2026 will be roughly $6,200,000 per individual or $12,400,000 per married couple.
This number will likely stay constant except for a slight annual adjustment each year to offset inflation. Depending on your marital status, if you expect your estate to be worth more than the exemption in ten years, it’s probably time to start planning.
Remember estate planning involves buying a permanent life insurance policy, and these policies increase in cost by 10 to 15% each year we age. Waiting seven years to start planning will end up costing you double, if you’re still healthy enough to qualify for coverage.
We Can Help with Your Estate Planning Needs
Estate planning involves creating an irrevocable trust with an attorney, but it also requires purchasing a life insurance policy to fund your trust. At JRC Insurance Group we specialize with estate planning life insurance and we can help you find the best rates based on your age and health.
By working with more than 50 top-rated insurance companies, we can shop the market to find you coverage until the age of 90, 95, 100, 105, 110, or 120, even if you have some health issues. Our agents offer multiple years of experience and we are experts at deciphering each company's unique underwriting guidelines.
As an owner-operated, no-fee brokerage, our client’s our always our number one priority. We can help you with your estate planning needs, and help you estimate the amount of coverage you need, to ensure that your hard-earned assets are passed on.
Give us a call today to speak for a customized quote based on your needs and health. Toll-free 855-247-9555, or you can request a free quote below to compare lifetime coverage options form dozens of highly-rated insurers in less than a minute.
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.
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Questions From Our Visitors
Some of the questions we received from our website visitors:
It is mentioned in your website that the 2019 NY estate tax exemption limit will match federal limits (now about $11.180 million). But the NY State website says the amount is $5.760 million for 2019. See above NY government website. FYI.
Thanks Edward. We have updated our table to reflect the correct Estate Exemption limits for the state of New York.