Gift and estate taxes are similar and closely related but distinct areas of the US tax code. Typically, only individuals with significant wealth will need to worry about the estate tax.
If you are wealthy enough to have to plan for the estate tax, you will almost certainly need the assistance of a tax professional or wealth planning professional to help design the most optimal long-term wealth planning strategy for your situation.
Estate tax key takeaways
The estate tax applies to the transfer of property after an individual’s death and is calculated based on the total aggregate (fair market) value of that individual’s assets and interests at the time of death.
Estate tax return and payment is due 9 months after the decedent’s death.
Filing is only required if the value of the estate exceeds the exemption of $12,920,000 (2023) or $13,610,000 (2024)
note: these are the same thresholds as the gift tax.
Decedents can transfer any of their unused exemptions to a surviving spouse.
In general, property passed to surviving spouses is exempt from estate taxes.
Some states have their own estate tax scheme which could apply in addition to the federal estate tax.
Note: Estate tax is different from Inheritance tax, which is applied to the recipient of inherited money or property. There is no federal inheritance tax, but some states have their own inheritance tax schemes. Inheritance tax is beyond the scope of this article.
How is the value of an estate determined?
The estate is valued based on the “fair market value” of its assets at the time of the decedent’s death (not the original price paid for the property). Physical property may need to be appraised to determine its monetary value.
Deductions are then applied to this value, which can include, but are not limited to:
Mortgages
Debts
Estate administration expenses
Property that passes to surviving spouses
Property that passes to qualified charities
The net amount is combined with the value of the decedent’s lifetime taxable gifts (since 1977), and finally, the unified tax credit is deducted from the total.
Full details on calculating the value of an estate can be found here: Instructions for Form 706
How is estate tax calculated?
An estate tax return only needs to be filed if the total value of the estate exceeds the filing threshold for the year of the decedent’s death:
2023: $12,920,000
2024: $13,610,000
The marginal tax rate for estate tax is the same as the gift tax rate, refer to the table in the gift tax section above for details. As with gift taxes, only the amount which exceeds the threshold is taxable.
State vs. Federal estate taxes
The details listed above all pertain to the US federal estate tax. As mentioned above, some estates have their own estate tax schemes, and in most cases, their exemption thresholds are lower than those of the federal tax program. If you are a resident of one of these states, be sure to check their respective tax websites for additional information:
How are estate taxes filed and paid?
Estate tax returns are filed by the executor of an estate. If no executor is appointed, any person in possession of any property of the decedent is considered an executor and must file a return.
The return must be filed and payment made within 9 months after the date of death. You may use Form 4768 to file for a 6-month extension.
Form 6166 can be used to elect to pay in installments
A number of supporting documents may be required:
The death certificate (mandatory)
A certified copy of the decedent’s will and trusts
Copies of any relevant appraisals
Copies of documents relevant to any ongoing litigation
In cases where the decedent is a nonresident US citizen, a transfer certificate must be applied for in order to facilitate the transfer of the property to inheritors.
The full instructions for filing a tax return can be found here, and the official IRS website’s estate tax FAQ page can be a useful reference.
If you are wealthy enough to be subject to estate tax, It is strongly recommended to retain the services of a certified tax professional to help manage your estate tax planning well in advance.
This is doubly true if you live overseas or have significant assets overseas, as special care needs to be taken with regard to structuring your overseas assets to minimize double taxation and potential tax owed on your estate.
There are a number of mechanisms for minimizing estate tax, including but not limited to trusts, life insurance policies, or other financial instruments. The details of these are beyond the scope of this post, but we at Del Sol CPA and Associates would be happy to offer a consultation or answer any questions you may have about wealth planning. It’s never too early to start planning ahead!
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