2020 Federal Estate and Missouri Inheritance Taxes
With the passing of a New Year comes a new year tradition – updating the estate and inheritance tax rates. This is the 2020 update, straight from our good friend, the Internal Revenue Service.
Estate tax is charged to the estate of a decedent, not their beneficiaries. However, as much as politicians like to scare people with talk of the “death tax” (a.k.a. estate tax), the estate tax only affects 2 out of 1000 estates in America.
In 2020, the threshold for federal estate tax is $11.58 million, a slight increase from 2019 when the threshold was $11.4 million. This new threshold was part of the Tax Cuts and Jobs Act which went into effect on January 1, 2018. Simply put, an estate will not face estate tax in 2020 unless the value of the estate is higher than $11.8 million.
Additionally, estate tax is paid on only the amount over the $11.8 million.
Example: Tom dies in 2020 with an estate of $11.7 million. No estate tax is owed. Tim dies in 2020 with an estate of $12.9 million. The estate is $1.2 million over the threshold and the tax rate is 40% of $1.2 million, resulting in an estate tax balance of $480,000. That’s a big bite, but as an O’Fallon trust attorney I can tell you that proper estate planning can always reduce a taxable estate.
If a decedent was married when they passed away, there is an opportunity to transfer the $11.58 million down exemption to the surviving spouse, effectively doubling their threshold to $23.16 million when the surviving spouse passes away. This is known as portability.
However, in order to take advantage of this opportunity, an estate tax return must be filed when the first spouse passes away.
State Estate Tax
In addition to the federal estate tax outlined above, some states also have an estate tax. In 2020, only 13 states have a state estate tax and this includes Illinois.
Good news: Missouri does not have a state estate tax. You can die with a billion dollars in Missouri and your estate will not owe Missouri any estate tax (yay!).
State Inheritance Tax
Estate taxes are charged against the estate, not the beneficiaries, for the transfer of assets after the death of a decedent. By contrast, inheritance taxes are a tax on the beneficiary (or heir) for the receipt of assets from an estate. Only six states have a state inheritance tax and Missouri is not one of them (yay!).
Annual Gift Tax Exclusion
A person who may be worried about having a taxable estate may want to consider utilizing annual gift tax exemptions. In 2020, a person can give away $15,000.00 to charity or anyone they want, but a couple can give double that amount, or $30,000 to as many people as they want. This is a good strategy to whittle away a taxable estate.
As a buy estate planning attorney St. Peters, very few of my clients (nor myself) will ever need to worry about estate and inheritance taxes. However, the very nature of estate taxes is that they change over time. The recent doubling of the exemption followed a period of time where the estate tax exemption was $3.5 million. Still a lot, but a potential problem for many more people. You can limit your exposure to this by creating an estate plan, usually with a revocable living trust that can change with the changes in estate tax.