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The ABCs of federal estate taxes

On Behalf of | Aug 28, 2017 | Estate Taxes |

The idea of estate taxes can be troubling. If you have extensive property that has a value of $10 million or more (if you are married), estate taxes can become a very real concern. However, for some people, estate taxes are never an issue.

When you pass, the last thing you want is the value of your California estate to be diluted due to taxes and thereby reducing the amount of assets your heirs stand to inherit.

When it comes to limiting estate tax liabilities, the key is to plan ahead. Through estate planning, you can develop strategies and tools to limit the amount of federal taxes your estate will have to pay after your death. Read further for some key points on estate taxes that you can talk about with your estate planning attorney.

The basics

Included in the government’s tax structure is the federal transfer tax system. Estate taxes are part of this system. In addition to estate taxes, it also includes gift taxes and the generation-skipping transfer tax (GST). Currently, estate taxes and gift taxes follow the same tax rate schedule. They also share a credit which consists of a certain dollar amount that will be free from taxation. However, the system reduces this credit cumulatively. That means that if you use the gift tax credit various times throughout your lifetime, it will reduce credit that you can use against your estate taxes. Fortunately, there are certain deductions that you can use to limit the estate tax liability.

The basis for the calculation

When you begin to figure the possible estate tax, you must begin with the gross estate. In general, the value of most assets in an estate is based on their individual fair market value. In other words, if you were to sell the property, how much could you get for it?

Appraisers usually use either the date of death or the date six months after in order to determine an asset’s value. Some assets are easier to value than others. For example, the face value of your retirement account is a fairly straightforward calculation. On the other hand, determining the value of a closely held business requires an appraisal of the books and an estimate of future profitability.

Exclusion amount

In order for an estate to owe federal taxes, it must have a value over a certain amount. At the moment, an estate of a single individual with a value of $5.34 million or under will generally not be liable for estate taxes. If you are married, the exclusion amount is $10.68 million. Be aware that the exclusion amount periodically changes due to economic trends and that these amounts may change by the time your estate may be subject to federal taxes.

If you are concerned that your estate may owe tax after your death, you should start putting a plan in motion to address the issue. By employing the proper estate planning strategies and tools, you may be able to significantly limit the liability.