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The Federal Estate Tax

This White Paper will briefly discuss the Federal Estate Tax and the implications and possible applications available to solve complex financial obstacles


One of the largest taxes Americans can face is the Federal Estate Tax. The Federal Estate Tax currently applies (as of October 2023) to individuals with an estate worth over $12.92 million, and married couples with an estate worth over $25.84 million. The initial value of the estate that is not subject to the Federal Estate Tax is known as the Federal Estate Tax Exemption. The exemption is adjusted each year to account for inflation.


However, as we are approaching the end of the Tax Cuts and Jobs Act of 2017, the Federal Estate Tax Exemption is set to decrease by 50%. As we enter 2026, the Federal Estate Tax Exemption is likely to be around $6.5 - 7 million for individuals, and $13 - 14 million for married couples. For people with large estates, the resulting estate taxes are far from miniscule. Below are the current Federal Estate Tax rates.


federal estate tax rates

As you can see, the tax rate quickly enters the 40% tax bracket, which can cause all kinds of issues, especially if you are the owner of a business.


Example

Let’s look at a quick scenario and the impact that Estate Taxes can have if you don’t properly plan for them.


Joe is single and is part owner of a business. His equity in the business is valued at $25 million. He has another $3 million in other assets. Therefore, his total estate is valued at approximately $28 million. Should he pass away today, he would have a $12.92 million Federal Estate Tax Exemption. The remaining $15.08 million is exposed to the Federal Estate Tax. $345,800 would be taxed out of the first $1 million above the Exemption limit, and out of the remaining $14.08 million, 40% would be subject to the Federal Estate Tax. That’s an additional $5.632 million in taxes. The total estate taxes would therefore fall just short of $6 million.


What would the beneficiaries of Joe’s estate do? Almost $6 million of estate taxes would be due following his death. Even if they sold all of Joe’s other assets, there would be another $3 million due. Could they properly exit the business, and get a fair payout for the exit?


What if Joe were to have passed away in 2027 with the same estate value? Instead of just under $6 million of Federal Estate Taxes, Joe would now face (assuming the Federal Estate Tax Exemption in 2027 is $6.5 million) Estate Taxes of $8,545,800.


As you can see, the Federal Estate Tax can pose challenges if not properly planned for. At SKA Financial Group, we have decades of experience planning for this issue. Make sure your family and business are properly taken care of when you leave the world behind.


Contact us today for your planning needs!

(559) 322-2230

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