With the new year comes new estate and gift tax exemption levels. But what does this mean for you? Most clients I meet with are surprised to learn they (or more accurately, their family or beneficiaries) won't need to pay taxes when they die. As the estate tax laws are now, most people's estate will not need to pay taxes at death. Here is a very simplified explanation of how the Estate Tax works and why most people don't pay estate tax. 

Wisconsin currently does not have an "inheritance tax" on beneficiaries, so when talking about the estate tax, or "death tax" in Wisconsin, we're talking about federal estate tax. The IRS defines this as "a tax on your right to transfer property of your death." Your estate consists of everything you own or have an interest in at the date of your death. For 2025, you are able to transfer $13,990,000 million at death without your estate paying any tax. (Note that without action by Congress, this figure is set to decrease January 1, 2026 but it's unknown what will happen.) With proper planning, this exemption can double for married couples. Put simply, this means for people who die in the next year with less than $13+ million to their name, their estate pays no estate tax. But for those estates above the exemption level, a 40% federal tax rate would apply.

The exemption amount at death, however, also adds any gifts made during life that were more than the gift tax exemption.

The gift tax exemption is the amount of which you can make a gift to an individual without having to file a gift tax return. In 2025, the gift tax exemption will increase to $19,000 per giftor, per recipient. This means you can gift up to $19,000 to an individual in the year without having to file a gift tax return (double for spouses). Notably, even if you make a gift above the exemption level, no tax is necessarily due. The purpose of the gift tax return is to allow the IRS to keep track of your lifetime gifts. When you die, the total of your lifetime gifts is added to the amount of your gross estate to determine whether any filing is required or tax is due. 

The federal exemption amount and the federal tax rate can and do change. Some recent proposals in Congress were looking at decreasing the exemption amount to as low as $3 million per individual. This figure still means most people won't need to worry about estate taxes, but the decreased exemption amount would apply to many more individuals than now. There are planning strategies that be taken during life to minimize estate taxes by working with your accountant, financial advisor, and estate planning attorney.

However, it is important to note that estate tax planning is different than other post-death tax planning. It may make sense to do income tax planning for beneficiaries of qualified and retirement accounts or other planning for potential capital gain tax. But for those who don't expect their estate to get close to exemption levels, complex tax planning to avoid the federal estate tax probably isn't necessary under current tax laws.