Episode 51: Estate Taxes Explained (Without Putting You to Sleep)

Estate Taxes Explained (Without Putting You to Sleep)

It’s Peter Klenk, trusts and estates attorney, here to talk to you about death and taxes, these fascinating subjects. So again, sit back with your cappuccino, maybe a glass of bubbly, whatever you’ve got. Relax, and I’ll try to make this as interesting as I possibly can.

So, what are we talking about today? Estate taxes. You’ve heard about them, but let’s talk about them. Let’s explain them a little bit and just sort of give you the highlights so you understand. Because the reality is, you might be worried about something that doesn’t even affect you, right? It won’t even affect you at all.

Now, what are we talking about?

The world is full of various taxes: gas taxes, airport taxes, taxi taxes. A state or some states have inheritance taxes. These are taxes that are called transfer taxes.

What falls into that category? Like when you bought a house, you paid a transfer tax. The deed went from one person to you, or from you to somebody else, and the county and the state get a little bit of money on that transfer. Transfer tax. It’s the transfer that triggers the tax.

Well, an estate tax, an inheritance tax, is a transfer tax like all these other ones. It is paid because you died, in this case, and the assets transfer to somebody else. That transfer is the tax. So it’s not an income tax, it’s not a sales tax, it’s not a gas tax, it’s a transfer tax.

Okay, and that’s important because it’s understanding how it all works and who has to pay.

So the estate tax is a tax on the greatest value of the estate, and there might be some diminished amounts. So let’s talk about the federal tax first, because that’s the one everybody thinks about.

The federal tax, by the way, has kind of a fascinating history. Teddy Roosevelt created it back in the day to break up giant monopolies, right? If you died and you had over a certain amount of money, you paid, and the monopoly was broken up. Pretty clever.

But it’s changed and modified and continued on over time to what it is today.

Today, as we’re talking about this in 2026, everybody has a certain dollar amount that they can leave to somebody when they die without paying tax. So in the federal world, there is a value that, if you’re under, you don’t have to pay. It’s not for everybody. It’s only for the people with over that amount.

So let’s just stick with $15 million a person. As a couple, as a team, you have $30 million.

If you’re a single person leaving money, if you’re under $15 million, don’t worry about it. You won’t pay. It’s only for people with more than that amount.

And if you’re a couple working together, like giving money to your kids, it’s $30 million. So if you have $25 million, you’re under the limit as a couple. Don’t worry about it. Sit back, enjoy that cappuccino. You’re not going to pay federal estate tax when you die.

So if you’re over, it’s a 40% tax, right? Are there things that you can do to transfer assets and everything else? Yeah, but that’s not the subject matter here. We’re just talking about what the tax is.

And as you can imagine, a lot of people are worried about this, and they’ll never have enough money to worry about it. There it is.

Now, an accompanying tax, just because it makes sense, is the gift tax. People also call me up and say, “Well, I only can leave my kid this much money each year as a gift, and that’s what I’m going to do.”

And I say, “Well, how much money do you have?”

“I’ve got $2 million.”

And then I have to explain, it doesn’t apply to you.

But why?

That $15 million exemption against when you die, the gift tax was created about six years, I think, after the estate tax. Now, why?

Because the federal estate tax came in and said, “Hey, if you’re over X number of dollars, you pay.” Well, that only applied when you were dead, right?

So the lawyers ran around quick telling all their trustbuster billionaire clients, “Give your kids the money now, because it only applies when you’re dead.”

So they gave all their stuff away, a bunch of stuff, mansions and companies and whatever, and then they were going to avoid the tax.

So what Congress did is they plugged a loophole. They came back and said, “Hey, you have, in this case now, it’d be $15 million when you die, but you can use that up while you’re alive making gifts.”

You can give away $15 million today to your kids and not pay tax. But now you have zero exemption when you die, right?

You have 15. Use it while you’re alive, use it when you’re dead. That’s your choice. But you have 15.

So there’s an exemption for little gifts, and it goes up over time. It used to be $10,000 for the longest time. Now it’s up to $19,000.

The idea is they said, look, yeah, you’ve got the $15 million, but we don’t want to fight about birthday presents and tuition, right? Little things you do for your kids. So there’s a certain amount every year you can just give away and it doesn’t even count.

Now, that’s where everybody gets hung up, because they’ll say, “Well, that means if the exemption is $19,000, I can give every kid 19, but I can’t give them 20.”

That’s not what the rule is. You see what I’m saying?

You’ve got yourself $15 million plus the 19 you give away. So if you only have $2 million and you give your one kid the whole thing, you give them the whole $2 million, you can go live under a bridge the rest of your life. You’re broke.

There’s no tax because 19 of it is just free, right? The annual exemption. But you only used up a portion of your $15 million. You still have way more you can give away.

So that annual gift thing only applies to people who have more than $15 million, or a couple with more than $30 million. It doesn’t apply to the vast majority of people, but everybody somehow thinks it does.

Does the rule say if you go over, you should file a return? Yeah. Is there a penalty if you don’t? No.

So again, don’t sweat it for these gifts if you’re under the $15 million.

Now look, this is a very generalized comment I’m making, and you might have a specific situation that applies. So that’s why you should talk to your estate planner. You should talk to your accountant about these things, about what needs to be done.

But you can kind of see, for the vast majority of people, give your kids whatever you want, whenever you want, because you’re never going to hit $15 million, right?

There you go. So that’s the federal estate tax.

Now states also have taxes, right? Why do they have taxes? Because they need money to build roads and pay for things, right?

So they have income taxes, real estate taxes, gas taxes. I mean, there are different ways to raise revenue.

In some states, like Pennsylvania, they have an inheritance tax. Well, why? Because our income taxes are low. Right over the border, New Jersey’s got a higher income tax. They make their money that way, but they don’t have an inheritance tax down the bloodline.

Pennsylvania does. Why? Because we have low income tax.

All these states get their money some way, guys. Don’t get too lost in the details of one tax versus the other and be mad about it, because your state probably has a tax that is making the same dollar amount. It’s just that you’re paying while you’re alive. In Pennsylvania, pay when you’re dead.

So, hey, which would you rather do, pay while you’re alive or dead, right?

So what is that tax?

Well, in Pennsylvania, there’s no de minimis amount. Everybody pays. So, like the federal tax, you have to have $15 million. Pennsylvania, no. One dollar. That’s all you need, right?

The rate depends on your relationship with the person that you’re leaving the things to.

So if you die and leave money to a charity or your spouse, the rate is zero. You don’t pay tax.

If you die and leave it down your bloodline, kids, grandkids, whatever, it’s four and a half percent.

Whether you do this as a transfer on death, whether you do it through your will, whether you do it through a revocable trust, there’s no way around this by just changing the vehicle, how you get it to them.

Because remember, it’s a transfer that’s triggered by your death. They get it because you died. There’s a transfer. It doesn’t really matter how you do it. Your death triggers it. It triggers the transfer tax, right? That’s how that works.

Now look, it’s four and a half percent down the bloodline. There you go.

Exceptions, life insurance. Why? The life insurance industry had a great lobby. So life insurance isn’t taxed.

But IRAs, jewelry, you name it, all your stuff, chickens, cows. What’s the value? Four and a half percent tax.

If you go to brothers and sisters, it goes up to 12. And if you leave it to anybody else, it’s 15%.

So nieces and nephews, your girlfriend, your boyfriend, 15%, right? It’s a higher rate because they just decided that it’s going to be lower for people that you’re related to or married to. Just a decision they made in Harrisburg. That’s the way it is.

So you have the state potential tax, you have the federal tax. The state depends on where you’re at. It also depends on where your real estate is at.

So if you own a Jersey Shore home, that is New Jersey’s land. Pennsylvania doesn’t have a right to tax that.

So if you leave assets to your children, say the house in New Jersey at the shore, there’s no tax because New Jersey doesn’t have a tax down the bloodline.

But your Pennsylvania assets, Pennsylvania house, your companies, your 401(k)s, you will pay Pennsylvania on those things because you die a resident of Pennsylvania.

So land is taxed where it’s located. Everything else is taxed where you were a resident at the time.

So those are the taxes. I mean, they’re real quick and dirty.

You can see where most people who die in New Jersey and leave assets to their kids, there’s no tax. They don’t have $15 million, and they’re leaving it down the bloodline. Zero.

If you’re in Pennsylvania, usually there’s just the four and a half percent tax if you’re leaving it down the bloodline because you don’t have $15 million, or $30 million if you’re a couple, and you’re just paying the local tax, right? It goes down to the Pennsylvania tax, and that’s it.

So again, your specific situation, though, look, this is just in general. I’m going through it quick. Remember, this is what the taxes are today. They could change tomorrow.

So now that you understand, at least, it’s a transfer tax and how it’s triggered, you should probably just check with your accountant, your trusts and estates attorney. Make sure you know the law as it applies to you and your assets, and see if there’s anything you can do about reducing any tax that might be there.

So hopefully that was okay. Hopefully you didn’t make it all the way through your delicious coffee drink or your adult beverage, and you now have a little more clarity on this subject.

Happy to help if you are in Pennsylvania or New Jersey. Happy to talk to you about these things.

If you’re somewhere else, talk to your trusts and estates attorney who can help you.

And you guys have a great day. Remember to like and subscribe so, as time goes along, as I release these things, you get them and you can listen to my soothing voice.

All right, guys. Be well.