Your Assets Exceed The Estate Tax Limit-Now What?

By: Randall A. Denha, J.D., LL.M.

Death taxes are essentially a punishment for being successful. Working for your whole life to build a legacy, only for the government to take a portion when you pass away.

1. DOES EVERYONE HAVE TO PAY DEATH TAXES?

The estate tax is a voluntary tax paid by those who fail to plan or who hire the wrong planners. You can leave your assets to your children, charity or Congress.  Pick two. 

There is a federal estate tax exemption threshold of $12.92 million per year, below which estates will not be taxed. Any amount that your state is valued above that limit is subject to a 40% tax. It is worth noting that the estate tax limit is set to be halved in 2026.

Some states have additional estate taxes to be aware of as well, but not Michigan or Florida. If you stand to inherit money in Michigan, you should still make sure to check the laws in the state where the person you are inheriting from lives. In Pennsylvania, for example, the inheritance tax can apply to heirs who live out of state if the descendant lives in the state.

Michigan also has no gift tax. The federal gift tax exemption is $17,000 in 2023. If you gift more than that in a year to any single person, the amount over the exemption counts against your lifetime gift tax exemption of $12.92 million.

Should you choose to bequeath any assets to charity or have a surviving spouse, those assets are not subject to estate tax, but any other beneficiaries (such as children or relatives) are subject to estate taxes.

2. MY ESTATE IS OVER THE TAX LIMIT, WHAT NOW?

If your estate exceeds the tax exemption limits, proper planning is vital.

As previously mentioned, federal and state-level laws are not the same, and differences exist across state lines too. Estate planning around federal tax exemptions may not work for your state’s tax law and vice versa.

If an estate exceeds that amount, the top federal tax rate is 40%. A full chart of federal estate tax rates is below.

Here’s an example of how it works: Say your estate is worth $22.74 million and you aren’t married. Subtracting the exemption of $12.92 million, leaves you with a taxable estate of $9.82 million. Consulting the chart, you are in the highest bracket. Your base tax payment on the first $1 million is $345,800. You also owe 40% on the remaining $8.82 million, which comes to $3.528 million. That sum ($3.528 million), plus the base taxes of $345,800, means your total federal estate tax burden is $3.8738 million.

FEDERAL ESTATE TAX RATES
Taxable Estate*	Base Taxes Paid	Marginal Rate	Rate Threshold**
$1 – $10,000	$0	18%	$1
$10,000 – $20,000	$1,800	20%	$10,000
$20,000 – $40,000	$3,800	22%	$20,000
$40,000 – $60,000	$8,200	24%	$40,000
$60,000 – $80,000	$13,000	26%	$60,000
$80,000 – $100,000	$18,200	28%	$80,000
$100,000 – $150,000	$23,800	30%	$100,000
$150,000 – $250,000	$38,800	32%	$150,000
$250,000 – $500,000	$70,800	34%	$250,000
$500,000 – $750,000	$155,800	37%	$500,000
$750,000 – $1 million	$248,300	39%	$750,000
Over $1 million	$345,800	40%	$1 million

*The taxable estate is the total above the federal exemption of $12.92 million.
**The rate threshold is the point at which the marginal estate tax rate kicks in.

3. IS IT POSSIBLE TO SIMPLY GIFT ASSETS?

It depends on whom you gift an asset to and when you gifted that asset. If it’s your spouse, there is no limit on the value of assets you can leave them. However, anyone other than your spouse may be subject to gift taxes.

At the federal level, the $12.92 million tax exemption is actually both an estate tax and a gift tax exemption combined; meaning that assets gifted during your lifetime are included in that limit. So, if you gifted $5 million in your life, that unfortunately counts towards the estate tax exemption limit, and those who inherit your estate can only expect a tax exemption on the remaining $7.92 million.

There are annual allowances for smaller gifts without them affecting your estate tax exemption. The maximum gift allowance is $17,000 per person per year; anything over that requires reporting and therefore affects your estate and gift tax exemption limit. For married couples, they are jointly allowed to gift $34,000 per recipient per year. Following this logic, a married couple with three children can gift their children a total of $102,000 per year without exceeding the estate and gift tax exemption or having to file a gift tax return.

4. HOW DOES BEING MARRIED CHANGE ESTATE PLANNING?

As with many aspects of estate planning, being married could improve your options. There is something known as “Portability” under federal law that allows one spouse’s unused exemption to transfer to their spouse. As such, a married couple could theoretically have $25.84 million of their estate untaxed (until that is halved in 2026). To claim estate tax portability, the estate tax representative must file an estate tax return within 9 months of the first spouse’s death. If the estate needs more time to file for portability, they can apply for a 6-month extension. When filing the taxes, it’s important to select the portability election to have the benefits transferred to the surviving spouse

5. WHAT ARE THE DIFFERENT ESTATE PLANNING TACTICS?

There are three main tactics that estate planners use to reduce or avoid estate taxes: “Freeze,” “Squeeze”, “Stretch” and “Burn.” Engaging the right estate planner adept at handling high-net-worth cases is vital, as the required legal maneuvering is complex and even small mistakes can be costly; so much so that many estate planners choose not to take the client or only engage with a few of the different available tactics.

“FREEZE”

A Freeze describes the result of transferring assets, such as interests in a business or real property, out of an estate in such a way that future appreciation is not included at date of death – it has effectively been passed on to future generations. A Freeze is often coupled with a Squeeze. This is especially useful for people whose estates are growing faster than the rate of inflation, as the estate tax exemption is linked to inflation. Say your estate is currently valued at $12 million, just shy of the $12.92 limit now, but if your estate is growing faster than inflation is, your estate may soon exceed the limit and therefore be subject to estate taxes.

Using the “Freeze” tactic is not designed to eliminate estate growth, but rather to direct growth away from the core estate in order to avoid the estate tax.

Estate planners use a variety of methods to “Freeze” the estate size including, but not limited, to gifts, promissory notes, Defective Grantor Trusts, Grantor Retained Annuity Trusts, Preferred Partnerships, or Opportunity Shifting.

“SQUEEZE”

A Squeeze is the use of various planning techniques that have the affect of discounting the value of an interest prior to its transfer, so that its value, for transfer tax (gift tax) purposes is reduced. The is a technique developed to keep control and the benefits, but keep future appreciation out of your estate. A Squeeze is often coupled with a Freeze. A “Squeeze” refers to squeezing the estate to a smaller size, preferably below the estate tax limit. Estate planners commonly use methods like LLCs with certain restrictions to shrink the size of an estate or the value of an asset. As an example, a client may have an estate worth $20 million. At the moment, that exceeds the estate tax limit. An estate planner might advise them to transfer their assets into a special purpose vehicle with a 30% reduction in valuation; the IRS then views the value of the estate at $14 million although the actual value of their assets has not lessened.

A ”Squeeze” must come before a “Freeze.” Once an estate’s value is frozen, it becomes too late to squeeze down the estate, and any “Squeeze” would not apply to the estate.

“STRETCH”

A Stretch is the use of various planning techniques that have the affect of permitting assets to grow tax-free undiminished by either income or estate taxes. One example is naming a trust as the beneficiary of either a regular retirement account or ROTH retirement account. When disbursements from these accounts are controlled through a trust, not only are the assets protected from the beneficiary’s spouses and creditors, but they will continue to grow, diminished only by Required Minimum Distributions based upon the ages of the beneficiaries. In the case of a ROTH, there will be no income tax on these distributions – either in the trust or at the time of distribution to the beneficiary.

“BURN”

The final tactic many estate planners use is to “Burn.” A Burn is the use of various planning techniques that have the affect of reducing the assets in your estate, meanwhile creating value outside of your estate. An example of this would be a gifting program to an Irrevocable Life Insurance Trust. Another example is a Grantor Trust. With a Grantor Trust, the income and other gains from an asset remain outside of your estate, but you, the Grantor, are obligated to pay taxes. At first blush, this may seem the worst of all worlds, but on second look, the payment of taxes reduces your estate, but the gains are outside in your estate, in the Grantor Trust, the provisions of which benefit your children and grandchildren. Using the “Freeze” or “Squeeze” methods makes your assets immediately untouchable; that’s why it’s important to include a back-door clause that makes your assets accessible if necessary. As your assets being frozen or squeezed makes the money harder to access, it’s important to plan your estate with enough reserves to avoid having to dip into the frozen portion.