When Does the Estate Tax Kick In?

The inflation-adjusted federal estate tax exemption for decedents dying in 2016 is $5.45 million, up from $5.43 million in 2015. This means that if your taxable estate's assets are worth less than $5.45 million, no tax will be due.  If you are married, your spouse gets a separate $5.45 million exemption without owing federal estate tax. Tax is imposed, regardless of how you disperse your property or the relationship you have to the beneficiaries (except your spouse). The estate tax rate is 40%.

There was no estate tax in 2010.  In 2011, the basic exclusion was $5 million and a top federal estate tax rate of 35%. For those who died in 2009, your heirs owed no estate taxes in 2009 on the first $3.5 million (2006 -- 2008 on the first $2 million).

State tax liability

The estate tax exemption at the state level may differ from the federal estate tax exemption.  Some states follow federal law; others decouple from their federal counterpart.   Even if you do not owe any federal estate tax, you may incur a state estate or inheritance tax liability.

There are 15 states plus District of Columbia that impose an estate tax:  Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode island, Tennessee, Vermont, and Washington.

There is also a few states that impose an inheritance tax on the heir(s) of the assets of the deceased, with rates varying based on the relationship with the deceased: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Tennessee and Pennsylvania.

Our recommendation is to review your estate tax planning documents for any changes in your circumstances and how these changes in the federal estate exemptions affect your estate plan.