Millennials May Inherit $68 Trillion: Here’s What to Know About Estate and Inheritance Taxes

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The greatest wealth transfer will soon take place. Read on to find out what boomers and millennials will need to prepare for. 

As the baby boomer generation continues to age, they will inevitably pass on their wealth to the next generation. Studies suggest that millennials will inherit an astounding $68 trillion in the coming years, making them the wealthiest generation in history. While this may be great news for some, it also comes with significant tax implications. Inheritance taxes can have a substantial impact on the amount of money people receive from their loved ones.

The greatest wealth transfer in history

Baby boomers (born 1946 to 1964) are worth 12 times more than millennials (born 1981 to 1996), who are worth $100,000. The average boomer worth is currently worth $1.2 million. Their wealth is estimated to grow to $68 trillion by 2030, which millennials are expected to inherit. According to another study, by 2045, younger generations will inherit a whopping $84.4 trillion in wealth over a 25-year period. Of that amount, millennials are expected to receive $72.6 trillion, with the remaining going to charities.

This transfer could be the biggest in human history, but some doubt its importance. Experts predict that many boomers are retiring with debt and are using up their assets while in retirement. Regardless, many experts agree that there will be a massive wealth transfer. In addition to baby boomers being 10 times wealthier than millennials, millennials in the U.S. earn 20% less than boomers did when they were young adults. As a result, the gap between the two generations has nearly doubled in the past 20 years.

What are estate taxes?

Estate taxes are imposed on the transfer of assets after someone passes away. In the United States, these taxes are not imposed on every estate. Only estates valued above a certain threshold are subject to taxation. The current threshold for estate taxes in 2023 is $12.92 million and this figure doubles to $25.84 million estates for married couples. If an estate is valued below this amount, there will be no estate tax due.

Estate taxes are paid by the estate of the deceased person, not the beneficiary. When an individual passes away, the executor of the estate is responsible for filling out the estate tax return and paying the tax. This means the estate of a deceased person will only be required to pay taxes on the portion that exceeds this threshold.

How do estate taxes work?

Estate taxes are a tax on all assets owned by an individual at the time of death. These can include real estate, stocks and bonds, jewelry, cash, and other valuables. The percentage of estate tax charged ranges from 18% to 40% of the total value of the estate. For 2023, the federal estate taxes max out at 40% for taxable amounts greater than $1 million, which can take a big bite out of your bank account!

For example, let’s say your estate is valued at $15.5 million in 2023 and the expenses incurred before death, such as medical bills, funeral costs, etc., totaled $500,000. You would subtract that amount, which is known as the net estate. That means your total taxable estate is $2,080,000 ($15.5 million − $500,000 − $12.92 million threshold). Since the taxable amount is over $1 million, it is subject to the 40% tax rate. So the total taxes you owe would be $832,000 ($2,080,000 x 40%). The after-tax value that beneficiaries will inherit is $14,168,000.

Knowing the amount of estate tax due can help individuals plan for the future and ensure that the assets they intended for their heirs are indeed received. The federal government is responsible for levying the estate tax, but it’s important to note that some states also have their own rules and regulations.

Don’t forget about state inheritance and estate taxes

Some states also impose their own estate and inheritance taxes. Maryland is the only state that has both an inheritance and estate tax. These 12 states have an estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia.

Estate taxes are taxes on the value of a deceased person’s assets after their debts have been paid. Some states, such as Maine, don’t impose an estate tax on the first $6.41 million in 2023 of an estate. For amounts above that, Maine taxes at rates from 8% to 12%.

Five states (Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania) have only an “inheritance tax.” This tax is on what beneficiaries receive from the estate. Kentucky taxes inheritances at up to 16%. Spouses and certain heirs are typically excluded by most states from paying inheritance taxes.

If you live in one of these states, it’s important to understand the rules and regulations surrounding these state inheritance and/or estate taxes. These taxes are separate from federal estate taxes and can be complicated. By staying informed and proactive about estate taxes, you can minimize what you pay to protect your loved ones and assets.

Steps you can take to save on estate taxes

When it comes to estate taxes, nobody wants to pay more than they have to. Luckily, there are a few steps you can take to keep more in your savings account. One strategy is to gift money to your loved ones while you’re still alive. By taking advantage of the annual gift tax exclusion, you can give up to $17,000 per person without incurring any taxes.

Another tactic is to establish a trust to hold your assets. By placing your assets in a trust, you can ensure they’re passed down to your heirs without being subject to estate taxes. You may also want to consider using a charitable trust to donate a portion of your estate to a charity of your choice, which can help reduce your taxable estate. While these steps may require some planning and preparation, they can ultimately save you and your family a significant amount of money in the long run.

Additional steps will most likely require professional help. Estate and inheritance taxes are complicated, so consult with a financial advisor or estate planning lawyer to ensure you understand how these taxes may affect you and your family. In addition, unless Congress makes 2017 Tax Cuts and Jobs Act (TCJA) changes permanent, the exemption will revert back to the $5.49 million exemption (adjusted for inflation, around $6.2 million) after 2025. It’s important to continually update your estate plan to reflect the current laws.

With millennials set to inherit $68 trillion, it’s important to understand how estate and inheritance taxes can impact the amount of money they receive from their loved ones. However, for the majority of Americans, estate taxes will not be an issue. Only estates valued above $12.92 million are subject to taxation. Some states also impose their own estate and inheritance taxes, so it’s essential to do your research if you live in one of these states. It’s always a good idea to consult with a professional like an estate attorney to make the most out of your inheritance.

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