Virginia Estate Tax Explained

The estate tax is a tax imposed when transferring a deceased person’s estate to heirs and affects the estate’s beneficiaries. The tax rate is based on the size of the estate and where the estate is based. So how does the estate tax work in Virginia, and what are its tax rates?

This article will dive into the Virginia estate tax, how it works, and more!

What Is The Estate Tax?

Before diving into the Virginia estate tax and its workings, let’s get into the estate tax basics.

The estate tax is a tax on the transfer of assets between generations, i.e., from parents to their heirs. It is generally imposed on the estate’s total value and any gifts made before the person passes away above a pre-determined exempt amount that varies by state. Starting in 2023, individuals can transfer up to $12.92 million, during life or at death, without triggering the federal estate-tax bill, up from the 2022 exemption amount of $12.06 million.

However, each state has its own state-specific estate tax rules. Some states may not impose an estate tax, while others have a high estate tax rate. Moreover, the tax rate varies depending on the value of the gifted assets; typically, the more assets you pass on, the higher the tax rate you will lose to the estate tax.

These taxes are intended to reduce the wealth concentrated in a single estate by increasing the taxes on inherited wealth. Still, they can be minimized or completely avoided through estate planning.

Virginia Estate Tax

Currently, the estate tax in Virginia in 2023 is 0% (zero). As a result, when passing assets on, you won’t owe Virginia estate taxes when passing assets on. Zero-estate taxes make Virginia attractive for wealthy individuals and those with large estates, as they can pass on their estates to their heirs without worrying about the government taking a significant portion of their wealth. However, if the estate’s value exceeds the federal tax exemption amount, then the estate is responsible for paying the remaining tax.

You are probably wondering how does the Federal Estate tax work for Virginia?

Federal Estate Tax

The Federal Estate Tax is a tax on assets transferred from a person who passed away to their heirs. It is paid by the dead person’s estate and is due nine months after death. Federal estate taxes range from 18% to 40%. This means that if you are giving away $1 million, over and above the federal estate tax exemption, you would owe $400,000 in federal estate taxes and only leave $600,000 behind for your beneficiaries. And that’s even before accounting for any state estate tax liability!

Federal Estate Tax Rates

Taxable Estate Above $12.92 Million	Base Taxes Paid	Marginal Rate
$12,920,000 – $12,930,000	$0	18%
$12,930,000 – $12,940,000	$1,800	20%
$12,940,000 – $12,960,000	$3,800	22%
$12,960,000 – $12,980,000	$8,200	24%
$12,980,000 – $13,000,000	$13,000	26%
$13,000,000 – $13,020,000	$18,200	28%
$13,020,000 – $13,070,000	$23,800	30%
$13,070,000 – $13,170,000	$38,800	32%
$13,170,000 – $13,420,000	$70,800	34%
$13,420,000 – $13,670,000	$155,800	37%
$13,670,000 – $13,920,000	$248,300	39%
Over $13,920,000	$345,800	40%

What Is the federal estate tax exemption?

Each individual has a lifetime estate tax exemption — a gift tax exemption or the basic exclusion amount. This exemption is the value of assets you can give away, throughout your life and after your death, without being subject to the federal estate taxes described previously.

For 2023, this exemption is $12.92 million/per person. Because the exemption is per person, married couples can give away double that amount. In addition, as of 2023, you have an annual gift exclusion which allows you to give up to $17,000 per person/year that doesn’t count towards the gift tax exemption.

However, it’s essential to know the federal estate tax exemption level is scheduled to reduce by about 50% to $6.6 million when the Tax Cuts and Jobs Act sunsets in 2026, which is why it’s essential to get started with estate planning sooner rather than later.

So, how do all of these apply in the state of Virginia?

Example of Estate Tax in Virginia

Let’s say your total taxable estate is $18 million. Critically you won’t owe any estate taxes in Colorado since there aren’t any Virginia estate taxes but you will owe Federal estate taxes as the federal gift exemption is $12.92 million. Just from the Federal estate tax you/your estate would owe ~$2,346,000!

Or in other words, your heirs would get $15,654,000 after the estate tax if you didn’t do any estate planning work. Fortunately, with some estate planning, you could avoid those Federal estate taxes entirely.

Does Virginia have a Gift Tax?

Virginia does not have a gift tax exemption limit since there’s no estate tax for this state. To clarify this, estate and gift taxes are usually viewed identically because they are subject to the same rate and share the lifetime exemption amount. However, the one key difference is that the estate tax applies to transfers of the decedent’s property at death, whereas the gift tax applies to transfers made during his or her life. As a result gifts of any size are allowed to be given from one individual to another without any Virginia gift taxes.

Tax planning ideas to reduce your estate taxes in Virginia

While residents won’t face a Virginia estate tax, they may still face the Federal estate tax. Fortunately, there are solutions that can help minimize or altogether avoid the federal estate tax.

1. Use trusts: Establishing a trust can help reduce an estate’s taxable value and the estate taxes due. Three commonly used options are:
   • Spousal Lifetime Access Trusts (SLAT): With a SLAT, you can place assets into the trust, your spouse (and, in practice, you) can access the assets during your lifetime, and any appreciation will pass to your spouse free of the estate tax. Your children and other descendants can also be named as beneficiaries. Often, the trust is structured so that the children only become primary beneficiaries after your spouse’s death.
   • Grantor Retained Annuity Trust (GRAT): 99 of the 100 wealthiest Americans use a trust structure to pass assets on to future generations. With a GRAT, you can place assets into the trust, any appreciation above a set percentage will pass to your beneficiary’s estate tax-free, and you won’t use up any of your lifetime gift exemption. As a result, you can substantially reduce the size of your taxable estate while passing on assets to your heirs if you are willing to give some assets away to beneficiaries during your lifetime.
   • Dynasty Trusts: Designed to help individuals and families preserve their wealth, reduce or avoid estate taxes, and ensure that assets are managed and distributed according to their wishes over multiple generations.
2. Utilize gifting: By gifting assets before death, you can take advantage of your annual and lifetime gift exemptions to reduce your estate’s taxable value and allow future appreciation on your investments to take place outside of your estate and free of the estate tax.
3. Use marital deductions: Married couples can use the unlimited marital deduction to transfer assets to a surviving spouse without incurring any estate taxes.
   1. The marital deduction is a tax provision that allows an individual to transfer an unlimited amount of assets to a surviving spouse without paying any federal gift or estate taxes. This means that the surviving spouse will not have to pay taxes on the assets they receive. The deduction also applies to property jointly owned by the couple, such as a home. When one spouse dies, the surviving spouse can keep the property without paying taxes. The marital deduction is essential for married couples to reduce the estate taxes they will have to pay.
4. Invest in life insurance: Life insurance can be used to pay estate taxes, is generally exempt from income tax, and can be structured to avoid the estate tax by being put in an Irrevocable Life Insurance Trust (ILIT).
5. Create your will: This will allow you to designate how your assets will be distributed after your death. A will can help you decide who will receive your assets and in what proportions, which can help to minimize the probate fees owed from your estate to the government. A will might also encourage you to take advantage of certain tax deductions and credits available. This includes deductions for specific charitable contributions, medical expenses, and funeral expenses.

Conclusion

The lack of estate tax in Virginia is a positive for those in the state looking to pass on their wealth to their loved ones. Without a state estate tax, only Virginia residents planning to pass on more than $12.92 million over their lives will still need to deal with Federal estate taxes without proper estate planning.

Read more about other U.S. states and their estate taxes, use our Guided Planner tool to find helpful solutions, or schedule a time to talk with our expert team.

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