Estate Tax Explained

Estate Tax Explained
You’ll learn and experience a lot of new things when a close loved one passes away and you have to arrange end of life services. If you’re fortunate enough to inherit money, assets or property you’ll learn about a tax you may not have known existed. We’re talking about estate tax.

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What is estate tax? Will you have to pay estate taxes? How are the taxes paid?

We’ll answer those questions and more in this quick guide on estate tax. 

What is Estate Tax?

When a person dies their assets and property are in an estate. The person’s beneficiaries receive assets out of the estate based on the directions in the will or state probate laws if a will doesn’t exist. When the assets are transferred out of the estate, then estate taxes may be due.

Who Has to Pay Estate Taxes?

Luckily, you probably won’t have to pay estate taxes if you inherit assets. Estate taxes are based on the gross estate value, which means the overall value of the estate. The gross estate value minus any deductions is the “taxable estate”. 

Estate taxes are only paid if the estate is worth $11.7 million or more. The valuation is based on the fair market value of assets, not what was paid for the asset. 

How Are Estate Taxes Calculated? 

Just about everything the deceased owned is included in the gross estate calculation. The assets include: 

  • Money
  • Real estate 
  • Securities
  • Insurance payouts
  • Trusts
  • Annuities
  • Business interests 

All of these are added together to come up with the gross estate value. But that isn’t the end of the calculations. Then deductions will be made. The deductions can consist of:

  • Property transferred to a spouse
  • Property transferred to a charity
  • Mortgage debt
  • Some business interests
  • Estate administration expenses

If there are any lifetime taxable gifts those will be added to the total after the deductions. Now, you finally have the taxable amount for the estate. But you aren’t done yet.

After the estate tax is calculated available credits can be applied to lower the taxable amount. The Tax Policy Center has found that on average, when estate taxes had to be paid they were on less than 17% of the estate’s value. Even when a family business or farm is a part of the estate only 20% end up paying taxes. 

Are There Exceptions to the Estate Tax?

Many estates over $11.7 million have to pay estate taxes, but there are two exceptions. Typically, the spouse of the deceased won’t have to pay estate taxes on the assets that are transferred to their sole possession. And estate taxes aren’t paid by charities that receive benefits. 

Because of the taxable limits, very few estates are subject to estate taxes. In fact, 99.9% of estates don’t have to worry about the tax at all.  

How Do You Pay Estate Taxes?

An estate tax return must be filed to pay estate taxes. The executor of the estate is in charge of filling out File Form 706. The form must be filed within nine months of the deceased’s death. You can apply for a 6-month extension using Form 4768, Application for Extension of Time To File a Return.

The estate taxes can be paid in one lump sum by check or electronic transfer. You can also elect to pay the estate taxes in installments. 
The IRS has instructions for filling out Form 706 as well directions on where to file the taxes. If you are the executor of a sizable estate you’ll want to make sure to check out that information.

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