Wisdom Wealth Strategies Logo

Estate Taxes: Who Pays Them?

Get the latest expert financial tips and advice + access to our free financial checklists.

We are often asked about estate taxes and who is required to pay them.  The truth is that 99% of Americans will not owe estate taxes.  However, there are other planning aspects that we are likely to face.  In this blog, we will discuss the estate tax and the gross taxable estate, and explain common estate planning terms.

2013 Estate Tax

Your estate consists of an accounting of everything you own or have certain interests in at the date of death, including life insurance.  This value is termed the gross taxable estate.  The estate tax exclusion is the value that Americans can leave to heirs without paying estate taxes.  In 2013, the estate tax exclusion is $5,250,000 (indexed annually for inflation) per person.  The current estate tax rate is 40%.  Every dollar left to heirs above $5,250,000 will be taxed at 40% after death.

What is included in the gross taxable estate?

The gross taxable estate consists of the assets in which an interest is held at death.  The gross estate will also include gifts made during life which exceeded the allowable amount on an annual basis (currently $14,000 per person per year).  The figure may also include certain property which was transferred during life but in which an interest was retained.  For example, if you have property or financial interests that would become payable upon death, such as life insurance, it may also be included in the gross estate.

Typically, the property that constitutes the gross taxable estate is property held in the deceased’s name.  However, it may also include ownership interests in trusts, partnerships, and jointly owned property.  Common components of the gross estate include:

  1. Real estate
  2. Personal property(cars, clothing, furniture, jewelry and/or collectables)
  3. Financial accounts (bank and brokerage accounts)
  4. Business interests
  5. Life insurance
  6. Annuity contracts
  7. Pension benefits
  8. IRAs
  9. Retirement accounts (401(k), 403(b), etc.)
  10. All claims against others, such as claims involving a personal injury

**This is not a complete list.  If you’d like help calculating your personal gross estate, please contact us.

Important Terms:

  • IRD –  “income in respect of a decedent.”  IRD is income that is payable after the death of the person who was entitled to it and that would have been taxable to him or her if the person had lived to receive it.  The income is not included in the decedent’s final tax return because it was not payable until after death, but it is taxable to the estate or the beneficiary.
    • What kinds of income are IRD?  Common types of IRD are unpaid compensation owing at death, retirement plan benefits, IRAs, 401ks, and annuities.
  • Portability – In 2013, portability of the estate tax exemption between married couples was made permanent, which means that in 2013 a married couple can pass $10.5 million to their heirs free from federal estate taxes.  If one spouse does not use their full credit, the other spouse can.
  • Cost basis – Cost basis is the original cost of property.  It is a key piece of information when figuring the taxable impact of the asset.  In order to help heirs minimize taxes, keep excellent records of the cost of property and investments. In general, the recipients of inherited property do not have to pay taxes on the original cost if it can be proven.
  • Step to basis– The general rule applied to property received from a decedent is that the beneficiary’s new basis equals the fair market value of the property at the time of death.  For example, a beneficiary who inherits a home with an original purchase price of $100,000 and a fair market value on the date of death of $300,000 would receive a step up in the original cost basis from $100,000 to $300,000. If the beneficiary then sells the property for $300,000, the beneficiary would not owe any capital gains taxes.

Estate tax law is extremely complex, but proper planning can help preclude unnecessary taxation and leave as much as possible to heirs.  We encourage our clients to seek professional guidance and we are available to you to discuss your options or provide a referral to a qualified estate planning attorney.

Download our Free Financial Planning Worksheets

Join our mailing list to receive your 2024 Tax & Financial Planning Guide, as well as your Net Worth Statement and Spending Plan.