I frequently begin a consultation estate taxes with the phrase “I’ve got great news”. That’s because only the wealthiest fraction of one percent of the population will owe any estate taxes under the current laws. For decades, the estate tax laws have been built around the concept of an estate tax exemption — an amount below which even though there are taxable assets in the estate, no tax will be due. In 2022, that amount is $12.06 million. That’s a lot. For a married couple, it’s twice that much. There’s also a cost of living adjustment attached to this amount which causes it to automatically go up with inflation. Also, Congress has changed this fairly frequently in the last twenty-five years, and they have, so far, always raised the exemption.
More good news. If you don’t owe any tax, you don’t have to file an estate tax return. But be careful, and consult with your estate planning attorney and accountant (if you have one), because there may be reasons to file a return even if no tax is due. At any rate, one upshot of this discussion is that the estate tax, for those you might owe it, is a pretty big deal. If you are the Executor or Trustee (or both), trying to juggle the practical duties involved in administering an estate with the emotional impact of the loss of someone you care about can be difficult. In any event, if you are managing an estate which might need an estate tax return to be filed, this is not the time to save a few dollars but preparing the return your self. Instead, its a time to find a tax preparer who is experienced in preparing fiduciary tax returns. Beware that not all tax preparers, regardless of their level of education or training prepare estate and gift tax returns or fiduciary income tax returns. Some focus on individual 1040s, while others might be focus on business or partnership returns. You want someone with the right experience.
A few Probate Basics
Probate is the name given to the legal process involved in administrating the estate of a decedent. If the decedent left behind a valid Last Will and Testament, the person named as the Executor in that Will is responsible for administering the estate. If the decedent died intestate (without a Will), the court will appoint an Administrator to oversee probate. The Executor or Administrator has a wide variety of duties and responsibilities during probate. Among those responsibilities is calculating and paying any federal gift and estate taxes owed by the estate and also filing final income tax returns for the decedent as also for the estate (for income receiving during the period over which the estate is administered). For people who have planned with a Revocable Living Trust and have no assets controlled by their Wills, there may be no probate, and thus no Executor. In these cases, the Trustee of the Trust can sign these tax returns.
Understanding Federal Gift and Estate Taxes
The federal gift and estate tax is a federal tax on the transfer of wealth paid at the time of the death of a taxpayer. The tax applies to the value of the estate at the time of death plus the value of all qualifying lifetime gifts for which lifetime gift tax returns were not filed. While there are some exclusions, most gifts are subject to the federal gift tax. The rate of the federal gift and estate tax is 40 percent; however, a taxpayer is entitled to take advantage of the lifetime exemption to reduce the amount of taxes owed.
Beware that the $12M exemption I described above is scheduled to be cut in half on January 1, 2026, unless Congress acts to extend it between not and then.
Federal Gift and Estate Tax Forms
The accountant or lawyer preparing your estate tax return will use IRS Form 706 or 706GS(D) to calculate estate tax owed. A Form 706 must be filed on behalf of a deceased U.S. citizen or resident whose gross estate, adjusted taxable gifts, and specific exemptions exceed the applicable lifetime exemption. A Form 706 is also required if the Executor elects to transfer the “deceased spousal unused exclusion” (DSUE) amount (commonly known as electing “portability”) to the surviving spouse, regardless of the size of the decedent’s gross estate. Form 706-NA is used to calculate estate and GST tax liability for decedents who were classified as “non-resident aliens.” Form 706-GS(D) is used to calculate taxes due on trust distributions subject to the generation-skipping transfer tax.
How Do I Calculate the Decedent’s Estate Value?
Determining what assets are included when calculating a decedent’s estate value can be tricky if the decedent left behind a high value and/or complex estate. Generally, the decedent’s “gross estate” includes all the following:
- All property in which the decedent had an interest (including real property outside the U.S.)
- Certain transfers made during the decedent’s life without adequate consideration
- Annuities
- The includable part of joint estates with rights of survivorship
- The includable part of tenancies by the entirety
- Certain life insurance proceeds
- Property over which the decedent had a general power of appointment
- Dower or curtesy (or statutory estate) of the surviving spouse
- Community property in which the decedent had an interest
Sound complicated? It is. Again, if there’s a tax return due, there is enough wealth a stake to justify hiring an experienced profession to prepare the tax returns.
Contact Durham Probate Attorneys
If you think you might need the assistance probating an estate or administering a Trust, please contact the Durham probate attorneys at Clarity Legal Group by calling us at 919-484-0012 or contact us online.
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