Estate Tax

For anyone considering how to organize an inheritance, or pass special property or assets on to children or family friends, it is important to understand the implications of federal estate taxes. Although applicable to only a select number of estates, the estate tax can have a significant impact on asset transfers.

Understanding the Estate Tax

The federal estate tax applies to property or assets that are transferred from one individual to another after death. It is similar to the gift tax, but the gift tax applies to transfers that are made while the individual is still alive. Both the gift tax and the estate tax ensure that the federal government receives a portion of the proceeds transferred by individuals where the amount is sufficiently large.

The estate tax is levied only on those estates that have a gross value in excess of 5.4 million dollars. The tax that is imposed on these types of estates is 40%, the same as the gift tax. The gross value of an estate is determined by adding up the value of all property that the individual owned or had an interest in at the time of death. This can include both physical items, such as a home or cars, as well as intangible items such as bank notes, stocks, insurance policies, and other investments. For any property that is jointly owned, such as with a spouse, one half of the value of the property is to be included in calculating the full value of an estate. 

Finally, estate taxes may also be imposed at the state level, in addition to the federal estate tax. These are often known as “inheritance taxes” and may apply to estates that would otherwise be exempt from federal estate taxes.

Because many individuals have significant assets, personal property, and investments at the time of death, calculating the total value of an estate can be laborious and difficult. It often requires the help of an estate lawyer or other expert.

Estate Tax Exemptions

As mentioned above, any personal estates valued at less than 5.4 million dollars are exempt from the federal estate tax requirement and will not have taxes imposed. Additionally, estate transfers to a surviving spouse are also not subject to the estate tax. This means that when one spouse dies, any property owned jointly, or individually, by that spouse may transfer freely to the surviving individual without the hassle of dealing with estate taxes. Finally, when calculating the gross value of an estate, certain costs may be deducted from the total value. These include funeral planning, debts owed by the estate to another individual or entity, and the value of any assets that are transferred to charity.

Some individuals may also seek to avoid the estate tax entirely by seeking the advice of an estate planner who can help to move assets and property into certain vehicles such as trusts. Because funds placed in a trust are not owned by an estate-holder, they are not subject to the estate tax upon death.

Payment of an Estate Tax

If your loved one is determined to have an estate that is in excess of the 5.4 million dollar threshold and must, therefore, pay an estate tax, this is done through the filing of an estate tax return. Generally, the executor or representative of the estate will be charged with filing the return, and thus must be done within nine months of the individual’s death. Where an estate is particularly complicated, the filing can be extended for an additional six months, but the taxes must still be paid within the original nine-month period.

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