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Understanding how taxes affect your estate

Taxes can significantly affect how much passes from your estate to your heirs. Here's how they work.

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Points to know

  • The 3 federal taxes you need to be aware of are the estate tax, gift tax, and generation-skipping transfer (GST) tax.
  • Depending on the state in which you live, your estate or beneficiaries may also have to pay a state gift tax, estate tax, inheritance tax, or a combination of some or all of them.

Taxes on wealth transfer

There are 3 distinct but related federal taxes to be aware of—estate tax, gift tax, and generation-skipping transfer (GST) tax. The same tax is in effect currently for all 3 (40% in 2019). In addition, certain states impose their own transfer taxes. Here's how taxes might affect your estate and your heirs.

*Scheduled to be adjusted annually for inflation

Federal estate tax

The federal estate tax may be imposed on the value of your taxable estate, which is the total value of assets remaining in your estate after your exemption amount and any deductions you're eligible for have been subtracted. Assets that pass directly to your U.S. citizen spouse or a qualified charity are also excluded.

What's an exemption amount?

U.S. citizens are entitled to transfer a certain amount of money free of federal estate and gift taxes. In 2019, the exemption amount for U.S. citizens is $11.4 million, adjusted for inflation annually.

This amount is "unified"—it applies to gifts during your lifetime and amounts you bequeath after you're gone.

For example, your estate can use any portion of your exemption amount not used during your lifetime for gift tax exemptions. Conversely, if you've already used up your exemption amount by the time you pass away, your entire estate may be subject to estate tax.

Exceptions that benefit spouses

If you're married, it's important to know about the special rules for spouses that can reduce the size of your taxable estate and enable you to transfer any unused portion of your exemption amount.

See how taxes work for married couples

Federal gift tax

The federal gift tax is imposed when you make gifts during your lifetime that total more than the exemption amount.

However, certain gifts don't count against your exemption amount. You can transfer up to $15,000 in 2019 ($30,000 for married couples) to an unlimited number of people each year without incurring gift tax.

In addition, you can give unlimited gifts to your U.S. citizen spouse, contribute to qualified charitable organizations, and pay medical or tuition expenses for any person (as long as your payments are made directly to the medical provider or educational institution).

Generation-skipping transfer tax

The generation-skipping transfer (GST) tax may be due—in addition to the estate or gift tax—when you transfer assets to someone who is 2 or more generations from you. If the beneficiary isn't related to you, the tax may be imposed if that person is more than 37½ years younger than you.

Here are 2 examples of when the GST tax may apply:

  • A grandparent makes a direct gift to a grandchild.
  • A grandparent sets up a trust for a grandchild while the grandchild's parents are still alive.

Like the estate and gift taxes, the GST tax has an exemption amount ($11.4 million in 2019), so consult with your tax advisor before making gifts to younger generations.

State taxes

Depending on where you live, your estate or beneficiaries may have to pay a state gift tax, estate tax, inheritance tax, or a combination of these.

The State levies estate taxes on your assets before they're distributed to your beneficiaries, with rates ranging from 1% to 20%.

Inheritance tax rates range from 1% to 18%. These rates may be progressive and are determined by the amount of property received by the beneficiaries and their relationship to you. Direct descendants, for example, may pay one rate, while other beneficiaries may pay a higher rate.

State estate and inheritance taxes are generally deductible on your federal estate tax return.

States with estate and inheritance taxes

Source: CCH, a Wolters Kluwer business. This chart is as of January 1, 2018, and is subject to change without notice.

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Explore more topics

Federal estate tax rules for spouses

Tax rules for spouses can reduce your taxable estate and enable you to transfer a portion of your exemption amount.

Strategies to lower your taxable estate now

Transferring assets during your lifetime can lower your taxable estate, meaning your heirs will pay less in taxes.

Vanguard family legacy services

We're here to help. Talk with your Vanguard team.

Call 800-860-8392


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Vanguard family legacy services

We're here to help. Talk with your Vanguard team.

Call 800-860-8392


View your account or schedule time to talk with your relationship team.