Legal Definitions - estate tax threshold

The estate tax threshold, also referred to as the applicable exclusion amount, is a specific monetary limit established by the federal government. It represents the total value of assets an individual can transfer, either through certain taxable gifts made during their lifetime or as part of their estate upon death, without incurring federal estate or gift taxes. If the combined value of these transfers exceeds this government-set threshold, the portion above that limit may be subject to federal estate tax. This threshold amount is not fixed indefinitely; it is periodically adjusted by law.

Here are some examples to illustrate how the estate tax threshold works:

• Scenario 1: Estate Below the Threshold

  Eleanor passes away, leaving behind an estate valued at $8 million. Throughout her life, she made no significant taxable gifts to others.

  Explanation: Given that the federal estate tax threshold is significantly higher (for example, approximately $13.61 million in 2024), Eleanor's $8 million estate falls well below this limit. Because her estate's value is beneath the threshold, her beneficiaries will not owe any federal estate tax on her inheritance. This scenario demonstrates how the threshold exempts estates of a certain size from federal taxation.

• Scenario 2: Estate Exceeds the Threshold Without Lifetime Gifts

  Robert, a successful investor, dies with an estate worth $18 million. He was known for his philanthropy but chose to make all his charitable contributions through his will, and he did not make any substantial taxable gifts to individuals during his lifetime.

  Explanation: Robert's $18 million estate significantly surpasses the federal estate tax threshold (e.g., $13.61 million in 2024). Since he did not use any of his exclusion amount for lifetime gifts, the full threshold can be applied to his estate. However, the portion of his estate that exceeds the threshold (in this case, $18 million - $13.61 million = $4.39 million) would be subject to federal estate tax. This example illustrates that once an estate's value goes beyond the threshold, the excess amount becomes taxable.

• Scenario 3: Estate Exceeds the Threshold After Accounting for Lifetime Gifts

  Maria passes away with an estate valued at $12 million. During her lifetime, she had gifted $4 million to her children to help them purchase homes, which counted against her lifetime gift tax exclusion.

  Explanation: Let's assume the federal estate tax threshold was $13.61 million at the time of her death. Maria's lifetime taxable gifts of $4 million would first reduce her available exclusion amount, leaving her with $13.61 million - $4 million = $9.61 million of her exclusion remaining. Since her estate at death is valued at $12 million, and her remaining exclusion is only $9.61 million, the difference of $2.39 million ($12 million - $9.61 million) would be subject to federal estate tax. This example highlights how taxable gifts made during life "use up" a portion of the estate tax threshold, potentially leading to estate tax liability even for an estate that might otherwise appear to be below the initial threshold amount.