An important concern of our estate planning clients at BRMM is how estate tax and inheritance tax affect a Michigan estate. While the response to an individual client depends on a number of factors — including the value, nature and location of the estate property, and structure of the estate — there are general rules that apply to all estates.
Estate Tax for Michigan Estates
Estate tax and inheritance tax are very different. Estate tax is in effect a transfer tax imposed on the estate itself, while inheritance taxes are imposed on the heir of property. Some individual states have state estate tax laws, but Michigan does not. However, federal estate tax laws do apply to Michigan estates.
Federal estate tax law includes a lifetime transfer exemption, which excludes the exempted amount from transfer taxes — including estate taxes. When the exemption is exhausted, transfers are taxed at a 40% tax rate.
The Tax Cut and Jobs Act, which went into effect on January 1, 2018, made important changes in the lifetime transfer exemptions for federal estate and gift tax. The increased exemption levels may only be in effect until January 1, 2026, unless Congress acts to extend the effective date.
Before the 2018 law went into effect, the lifetime exemption was $5.49 million for individuals and $10.98 million for married couples. The Tax Cut and Jobs Act increased the exemptions substantially, more than doubling both of them.
The IRS annually adjusts the exemption amounts for inflation. For 2019, the lifetime transfer exemption for individuals was $11.4 million, based on the value of the estate at the time of death. The exemption increased to $11.58 million for 2020. The lifetime transfer exemption for married couples is $23.16 million for 2020.
The current exemption levels, combined with an increase in the annual gift tax exclusion to $15,000 that was included in the 2018 tax law, provide a significant estate planning opportunity for many people. Modifying your estate plan and gifting plan based on the changes in the law could result in substantial tax savings.
Inheritance Tax for Michigan Estates
Inheritance tax is levied by state law on an heir’s right to receive property from an estate. Only a handful of states still impose inheritance taxes. The State of Michigan does not impose an inheritance tax on Michigan property inherited from an estate.
The Michigan inheritance tax was eliminated in 1993. For individuals who inherited from a person who passed away on or before September 30, 1993, the inheritance tax remains in effect. In some unusual situations — such as after-discovered assets — inheritance tax may still be an issue.
For heirs of individuals who passed after 1993, inheritances from a Michigan estate that includes only property located in Michigan will not be subject to inheritance tax. But, if the estate includes property located in other states, a beneficiary who inherits the property may be subject to tax in that state.
As of January 1, 2020, only six states have laws imposing inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If a Michigan resident dies and leaves an estate that includes property in one of those states, the person who inherits that property may be subject to inheritance tax on the property, based on the laws of that state.
If you own property in a state that still imposes inheritance tax, a BRMM estate planning attorney can help you explore strategies for avoiding imposition of the tax. Those strategies should be explored and implemented as part of your estate plan before your death. Generally, after a person passes away, it is too late to take steps to avoid paying inheritance tax that applies to property in a state that imposes the tax.
Planning for Estate Tax and Inheritance Tax
A sound estate plan takes all potential estate tax and inheritance tax consequences into account. Discussing your estate plan with an experienced estate planning attorney is the only way to ensure that your plan maximize opportunities for tax savings under current law.
However, taxes are not the only consideration in developing your estate plan. The best approach for your estate plan is one that takes into account every aspect of your family circumstances and financial situation.
Talk with Our Respected Michigan Estate Tax Planning Attorneys
Located in Troy, Michigan, BRMM has been serving the estate planning needs of Michigan individuals and families since the 1970s. We invite you to talk with us about developing an estate plan and a gifting plan that are tailored to your and your family’s precise needs and take all tax considerations into account.
BRMM assists clients in Oakland County and beyond. We also represent clients from other states with an interest in a Michigan estate or trust or who have an aging loved one living in Michigan. Our clients count on our commitment, experience, and credentials when they turn to us for their legal needs.
Call us at (248) 494-4577 or complete our online form to set up a free initial consultation.