Federal Estate Tax
The federal estate tax is a tax imposed on the transfer of a person's assets upon their death. Here are some key points to understand about the federal estate tax:
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Applicable Exemption: The federal estate tax applies only to estates that exceed a certain exemption threshold. This exemption amount is periodically adjusted for inflation. As of 2021, the federal estate tax exemption is set at $11.7 million per individual or $23.4 million for a married couple (under the concept of portability, where the unused portion of one spouse's exemption can be transferred to the surviving spouse). It's important to note that these exemption levels may change over time due to legislative action.
 
Tax Rates: For estates that exceed the exemption threshold, the federal estate tax is imposed at a progressive rate. The tax rates range from 18% to 40%. The highest tax rate of 40% applies to the portion of the estate value that exceeds the exemption amount.
 
Gift and Estate Tax Unified Credit: The federal estate tax and the federal gift tax share a unified credit. This means that the lifetime gifts made by an individual also impact the available estate tax exemption. For example, if an individual has used a portion of their exemption during their lifetime by making taxable gifts, the remaining exemption available at death will be reduced accordingly.
 
Marital Deduction: The federal estate tax provides a marital deduction, which allows unlimited transfers of assets between spouses without incurring estate tax. This deduction ensures that estate taxes are not immediately imposed when assets pass from one spouse to another, deferring the tax until the death of the surviving spouse.
 
Portability: The concept of portability allows a surviving spouse to utilize any unused portion of the deceased spouse's estate tax exemption. This means that if the first spouse to die does not fully utilize their exemption, the remaining amount can be added to the surviving spouse's exemption, effectively increasing their own exemption amount.
 
Estate Tax Planning: Estate tax planning strategies, such as creating trusts, utilizing annual gift tax exclusions, and making charitable donations, can help reduce the overall estate tax liability and maximize the value passed on to beneficiaries.