First of all, please remember that the classification of property as probate or non-probate has no bearing on whether property is subject to estate tax. If you own property, or have sufficient control over property that the government has deemed it close enough to ownership, it is subject to estate tax.
In the recent past, there were two estate taxes we had to consider: the Federal Estate Tax and the Ohio Estate Tax. Each tax system has its own features, but both tax a portion of the value of your property, upon your death. While technically the tax is not upon your property, but rather upon the privilege of being able to transfer your property upon death, it is a distinction without a difference.
Federal Estate Tax
With the American Taxpayer Relief Act of 2012, Congress made the $5 million exemption from the federal estate tax permanent. The exemption is indexed for inflation, and the IRS said that the adjustment for 2013 raises the exemption to $5,250,000. The federal estate tax system taxes all property you own, including real estate, life insurance, stocks and bonds, and retirement plan balances.
Once you are in the federal estate tax system, it is painful. Each dollar over the exemption amount is taxed at a 40% rate. That’s 60¢ for your family, and 40¢ for your favorite relative, Uncle Sam.
Property passing between spouses is not subject to estate tax, which is good. As part of the 2012 tax act, Congress also made permanent "portability" of the estate tax exemption. Under portability, the surviving spouse can use the part of the estate tax exemption that the predeceasing spouse did not use.
If your property will be passing to someone other than a surviving spouse, and you are fortunate enough to have property is excess of the exemption amount, there still are techniques including using trusts, and making gifts to charities and individuals, that can be used to minimize the impact of the federal estate tax.
In estates in excess of $5 million, it becomes important to understand the impact of Federal Estate Tax. When we work with our estate planning clients, we review the potential federal estate tax implications. If you would like us to help you with your planning, please contact us.
Ohio Estate Tax
Effective January 1, 2013, Ohio repealed its estate tax. Prior to that date, Ohio imposed an estate tax on estates in excess of roughly $338,000. The maximum tax rate was 7%.
If someone died before the repeal of the Ohio estate tax, a tax return will still need to be filed, even though the return might not be due until after the date Ohio's estate tax was repealed. For someone dying before the repeal, a tax release may also be required.
While going forward from January 1, 2013, Ohio estate taxes have become less important for planning purposes, they still may need to be considered in administering a decedent’s estate. For help with these issues, please feel free to contact us.