Navigating Challenges Associated with Death Taxes

Since 2021, many conversations have been had about the Build Back Better Act,  which saw several substantial tax increases. While some people have described the Act as dead, the future of the act remains uncertain. 

Despite what happens to the act, its contents are subjects to which Congress is likely to respond in regards to what is referred to as “death taxes”. 

A “death tax” is a type of “transfer tax” and is referred to as an estate tax. Most people are acquainted with income tax. If an individual receives a salary, the salary is taxed. If a person sells a property that has appreciated, the gain also receives what is referred to as a capital gains tax. Ordinary income tax, as well as capital gains tax, are two types of income tax.

In contrast to income taxes, transfer taxes are a type of tax on the right to transfer an asset 

without receiving something in return. These situations involve when a person makes a gift to someone and also in situations where a person passes away and someone receives assets from an estate. Three types of transfer taxes exist:

  • Estate tax, which imposes taxes on the estate before bequests occur 
  • Generation-skipping transfer tax, which applies to either bequests or gifts received by an individual who is at least one generation removed from you
  • Gift tax applies to gifts made during a person’s life

While managing all of these taxes is part of estate planning, this conversation focuses on both 

estate taxes and gift taxes.

People who create laws do not tax every gift a person receives. Lawmakers also do not tax every 

state. Instead, Congress establishes a financial cap for gifts that an individual makes during their lifetime or passes on after death before a transfer tax applies. This cap is referred to as an “exception amount”.

Following existing law, a person has an exception of a little over $12 million, while married 

Couples have a combined exception of a little over $24 million. Exception amounts will lower by half in 2026 unless Congress passes a law that impacts this threshold sooner. The time is now to utilize strategies that allow a person to make the most of existing death exemptions.

Deciding on the Impact

A hypothetical might better explain the role of these taxes. Assume, a single person whose net worth is $20 million. This person either can gift during their lifetime or pass on inheritance at the time they pass away of $12 million. If a person does not make any taxable gifts while they are alive, at death the person could pass approximately $12 million dollars without being subject to transfer tax. The remainder of the estate would be taxed at 40 percent, which means approximately $3.2 million would be paid 

The remainder of a person’s estate would be taxed at 40 percent, which means that $3.2 million would be paid to the IRS and the remaining $4.8 million would be left available to that person’s beneficiaries. If a person made taxable gifts of $10 million while they were alive, based on the $20 million, a person who gifts $10 million while they are alive uses up to $10 million of their $!2 million exemption. $2 million of exemption continues and a person’s net worth would be revalued at $10 million.

Assume the person passes away with a $10 million net worth and the $2 million exemption remains. In this situation, the $2 million passes to the beneficiaries free of the estate tax. The remaining $8 million is taxed at 40 percent, resulting in $3.2 million being paid to the Internal Revenue Service and the remaining $8 million is taxed at 40 percent, which results in $3.2 million being paid to the IRS and the remaining $.8 made available to beneficiaries.

Under existing law, a person can pass up to $12.06 million without transfer tax either while they are still alive or after death.

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