Reviewing Potential Estate Tax Liabilities

Past posts on this blog detailed the potential of Michigan residents having to pay an inheritance tax on assets received as part of a loved one’s estate. As that information described, the state has not imposed an inheritance tax since 1993. However, that does not mean that those party to an estate will not face any tax liabilities.

The most common tax obligation facing estates is estate taxes. Michigan residents face not only a potential federal estate tax liability, but also one levied by the state.

Michigan’s estate tax

According to information shared through the website for the State of Michigan, an estate tax replaced the inheritance tax that the state abolished in 1993. As of September 30 of that year, representatives of estates of local residents who die must file a state estate tax. The state does, however, offer an estate tax exemption. Beginning in 2002, that exemption threshold is $1 million, meaning that any estate whose total taxable value comes in under that amount is not subject to tax.

The federal estate tax exemption

The federal government also offers an estate tax exemption. Per the Internal Revenue Service, the exemption threshold for 2021 is $11.7 million. Married couples can work together to extend that exemption amount even further through estate tax portability.

Portability refers to the sharing of tax benefits between eligible parties. In the case of federal estate taxes, one can choose to leave their entire estate to their spouse upon their death. The unlimited marital deduction allows that amount to pass tax-free (thus preserving one’s entire estate tax exemption). Their spouse can then claim that unused exemption by filing an estate tax return electing portability. That effectively doubles their exemption to $23.4 million.