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Estate Taxation – Why Should I Be Concerned? By Denise Ware

The inflation-adjusted 2016 estate and gift tax exemption limits are set at $5.45 million per individual or $10.9 million per couple. This means that if you are a single business owner, you can leave up to $5.45 million to heirs and pay no federal estate or gift tax. Likewise, if you are married you can leave up to $10.9 million to heirs with no federal or estate gift tax penalty.

In addition to federal estate tax, there are 18 states plus the District of Columbia imposing estate or inheritance taxes, or in some cases, both. Check out the states that are impacted at Forbes. Each state tax rate is different, but the common denominator is that state estate taxes are deducted from the gross estate and then the federal estate tax is calculated based on the remaining estate.

Here’s an example of three states using the same gross estate value illustrating how state taxation differs.

 

 New York FloridaWashington
 Gross Estate $100,000,000 $100,000,000 $100,000,000
 Less State Estate Tax -15,466,800 -0 -18,334,990
 Net Estate $84,533,200 $100,000,000 $81,665,010
 Less Federal Estate Tax -31,633,280 -37,820,000 -30,486,004
 Net Estate Remaining $52,899,920 $62,180,000 $51,179,006

The above calculations include the applicable federal and state estate exemptions.

So why should you be concerned?

As published by the IRS, the federal estate tax is tax on your right to transfer property at your death and it consists of accounting for everything you own or have certain interests in, at your time of death. The calculations for value are based on the fair market value of the items including cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. This taxation is a disincentive for one to not be successful. In spite of these taxes, Americans continue to thrive and be successful in their business enterprises.

What assets have to be included in my taxable estate?

Your assets for estate tax purposes include:

  • Assets you control under your will – these are assets that are titled in your name or that are known to be your property, or from the reciprocal perspective that cannot be verified (by gift or sale) to be owned by another party.
  • Assets you hold in revocable trusts.
  • Assets can also be identified as joint title marital property in community property states.
  • All assets in your name, as well as those over which you have or are deemed to have “tax control” by the IRS.

Do all the assets have to be appraised to settle my estate?

Yes, assuming the value of your estate will be above the IRS thresholds for filing an estate tax return, your assets will need to be appraised by a qualified and independent third party. Valuation is either based on date of death or nine months after date of death.

Are estate taxes going away?

In 2015, the House of Representatives voted 240-179 to kill the federal estate tax. Currently there aren’t sufficient votes in the Senate for this to become reality however this vote is viewed as opening the door to repeal in the future. The reality is that estate tax represents a small percentage of the revenue collected by the Federal Government. The makeup of the political landscape will be the determinant on how much progress, if any, is made toward repealing the estate tax.

Should my estate plan involve gifting?

There should never be an obligation to gift. A great rule of thumb here is that responsible gift giving involves both the donor and recipient. A responsible gift is a non-self-serving transfer from someone who fully understands the impact the gift can have. It is also a transfer that will reasonably fulfill the expectations of the donor.

What do I do now?

The best advice is for you to be proactive in your estate planning. Consider reviewing your estate tax exposure which includes looking at your asset base and how you have it allocated. Ensure that you have your will and revocable trust in place and consider the implementation of irrevocable trusts to remove assets from your taxable estate. Talk with your advisors and assemble your team of experts to help take some of the complexities out of the planning.

Protecting your wishes for your estate, while ensuring that you are minimizing the tax burden to your heirs is all a part of planning. Estate planning is more than having a will. Looking forward to understand the transfer and potential tax implications is critical and can minimize the amount of taxes your estate or heirs will need to pay upon your death.


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