Estate Tax Law
Estate taxes are imposed by the federal government and some state governments on the transfer of a person’s property upon death. Estate taxes can apply when the decedent has an estate plan such as a will in place, and they can also apply if the decedent dies intestate (meaning without a will or other form of estate plan). A number of states have passed laws requiring the recipients of real estate or personal property to pay taxes on the property that’s being inherited. Although these taxes focus on recipients, rather than on the decedent, they are nonetheless considered a form of estate tax.
While it may be the last thing you want to think about, estate planning is an important step you can take to protect the interests of your family. A well prepared estate plan will help you ensure your wishes are carried out and your loved ones are taken care of once you’re gone. If you pass away without a plan in place, your family members may be left to sort out the mess in court.
Estate and gift taxes are imposed by the federal government on the transfer of property from person to another, either at death (estate tax) or while the giver of the property is still alive (gift tax). Below is a brief overview of both forms of transfer.
Estates are required to file a federal estate tax return if the value of the “gross” estate, minus certain deductions, is above a certain dollar amount ($5.49 million in 2017). The gross estate includes the value of all property in which the decedent had an interest at the time of his or her death — including such items as real estate, stocks and bonds, mortgages, notes and cash, insurance on the decedent’s life, and jointly owned property. If spouses own property in joint tenancy, and one dies, one half of the value of the jointly held property is included in the gross estate of the deceased spouse.
Estate Tax Exemptions
Personal Exemption. The “personal estate tax exemption” allows a certain amount (or all) of a deceased person’s estate to transfer free of the estate tax. This has changed over time, reaching the $5.49 million mark in 2017. At any time Congress may increase or decrease this amount, or even repeal the estate tax altogether.
Marital Deduction. A deceased person’s estate can pass tax free to a surviving spouse, as long as the surviving spouse is a U.S. citizen and the deceased spouse’s interest in the estate passes to the surviving spouse outright (in other words, the property transfers directly to the spouse upon the decedents death).
To understand how the marital deduction and personal estate tax exemption might work in practice, suppose Bob dies leaving an estate worth $12 million. Putting aside community property issues for the moment, assume that his will states that $6.49 million go to his wife, and $6.49 million to his daughter Kate. In this situation, no part of the $6.49 million Bob leaves to his wife will be subject to the estate tax (as long as Bob’s wife is a U.S. citizen and all the property included in the $6.49 million passes to her outright). Of the $6.49 million Bob leaves to Kate, however, $1 million will be subject to the estate tax (the $6.49 million minus the first $5.49 million that is tax-free under the 2017 personal estate tax exemption).
Other deductions. Other deductions against the gross estate include certain administrative expenses, funeral expenses, claims against the estate, certain taxes and other indebtedness and charitable bequests.
Filing the Estate Tax Return
The executor, personal representative, or person in possession of the estate’s assets must file the estate tax return within nine months of the decedent’s death. The estate can apply for a six-month extension of time to file, but the taxes must be paid within nine months of the decedent’s death. The time for payment of the estate tax may be extended in certain circumstances.
State Estate Taxes
Some states also impose estate taxes. The state in which the decedent lived may impose an estate tax, and states where real estate or personal property is located may also impose an estate tax. The law of each state having any connection to the property in question must be consulted in order to assess any tax consequences associated with the property transfer.
The gift tax is a tax on the legal transfer of property from one person to another, during the giving person’s lifetime. Certain gifts are exempt from the gift tax, including:
- Gifts valued at a dollar amount of $14,000 or less to any one individual in a single calendar year (as of 2017);
- Gifts to a spouse;
- Payment of tuition or medical expenses on someone else’s behalf;
- Charitable contributions; and
- Certain gifts to political organizations.