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Introduction
As the old saying goes, you can’t cheat death or taxes. In
fact, you might still owe taxes after you die! One of these taxes is the
federal estate tax. Generally, this is a tax that may be imposed on property
owned by you (or deemed to be owned by you) at the time of your death.
Any U.S. citizen who leaves an estate (plus adjusted taxable
gifts) in excess of the gift and estate tax applicable exclusion amount
($13,990,000 in 2025, $13,610,000 in 2024) may be subject to estate tax.
Estimating and planning for estate tax may be important to
you because this could be one of the largest expenses your estate may have to
pay. It also means that a significant part of your estate may go to the
government and not to your beneficiaries.
Estate tax may be imposed on all U.S. citizens and/or
residents. If you are a nonresident alien who owns property in the United
States, your estate may be subject to estate tax; however, certain adjustments
and requirements will apply. Although estimating estate tax can be complex,
don’t be overwhelmed. If you proceed step by step, you can do it. Estimating
estate tax is an important step in formulating and implementing a successful
master estate plan. The peace of mind that comes with implementing a successful
master estate plan should be worth your time and trouble.
Transfers of property you make to a person who is more
than one generation below you (e.g., a grandchild or great-nephew) may also be
subject to the federal generation-skipping transfer (GST) tax.
Some states also impose their own death taxes and GST tax.
State death tax rates vary from state to state but are generally lower than the
federal estate tax rates. However, states often will impose death taxes on
estates of lesser value than the federal government. To avoid double taxation,
a deduction is allowed
for certain state death taxes you pay.
How does the unified tax system work?
Before 1976 (when Congress unified estate and gift taxes),
gifts made during life (taxable
gifts) were reported — and any gift tax owed was paid — on an
annual basis. After death, estate tax was imposed only on property owned at
death (gross
estate).
Since 1976, generally, taxable gifts are still reported — and
any gift tax owed is paid — annually (generally, you must file a gift tax return
and pay gift tax due, if any, by April 15 of the year following the year in
which you make a taxable gift). But upon death, all post-1976 taxable gifts are
added to your taxable estate for estate tax calculation purposes, even though a
gift tax return may already be filed and a gift tax paid (post-1976 gift tax
paid is subtracted from the estate tax owed). Congress unified the gift tax and
estate tax systems so that: (1) you can’t avoid estate tax by giving your
wealth away before you die, and (2) you pay tax on the cumulative amount of
wealth you give away (this pushes your estate into a higher tax bracket).
How does the estate tax work?
Estate tax may be imposed on your taxable estate. The
taxable estate is your gross estate (the value of your property when you die)
reduced by the qualified conservation easement exclusion and various
deductions.
Your cumulative taxable transfers are calculated by adding adjustable taxable gifts you made during life to your taxable estate. A tentative tax is calculated on your cumulative taxable transfers, as well as on your adjusted taxable gifts. The tax is calculated under the Unified Tax Rate Schedule, which is graduated; the larger the value of your cumulative transfers, the greater the tax rate (much like your income tax). A tentative estate tax is calculated by subtracting the gift tax on adjustable taxable gifts from the estate tax on cumulative taxable transfers.
Credits are subtracted from the tentative estate tax, resulting in the estate tax that is owed.
The estate tax calculation looks something like this:
Gross Estate | |
– | Deductions |
= | Taxable Estate |
+ | Adjusted Taxable Gifts |
= | Cumulative Taxable Transfers |
Tax on Cumulative Taxable Transfers | |
– | Tax on Adjusted Taxable Gifts |
= | Tentative Estate Tax |
– | Credits |
= | Estate Tax Owed |
The maximum estate tax rate in effect is 40 percent (in 2024 and 2025).
If you have not made taxable gifts during your lifetime, there is a shortcut that can be used to estimate what your estate tax would be if you were to die in 2025. Simply subtract the applicable exclusion amount from the taxable estate, and multiply this amount by 40 percent. For example, estate tax on a $14,990,000 taxable estate for a decedent dying in 2025 would be $400,000 [$14,990,000 taxable estate minus $13,990,000 applicable exclusion amount equals $1,000,000; multiplied by the 40 percent top tax rate equals $400,000].
In general, estate tax should not be estimated by subtracting the applicable exclusion amount from the taxable estate, and then calculating tax on this amount from the gift and estate tax table with brackets. This will generally underestimate the amount of tax.
How is estate tax calculated?
Calculating estate tax is similar to calculating income tax.
It is basically a four-step process.
Determine what is taxable
The first step in estimating estate tax is to determine
what is subject to
tax. This includes property owned by you (or deemed to be
owned by you) at the time of your death (the
gross estate).
Gross estate
Identify taxable property. List all your property and
property interests — of any description, wherever located — at the time of your
death. A word of caution: What you do not ordinarily think of as being your
property may be considered your property by the IRS for estate tax purposes.
This includes property that passes through probate and property inherited
directly by joint owners or beneficiaries. Generally, your property includes:
- Real estate
- Personal property (e.g., cash, insurance proceeds,
cars, furniture, jewelry, art objects) - Intangible property (e.g., copyrights, patents,
stocks, bonds, notes)
Put a value on what you have identified. Assign a value
to each property item you have identified. Generally, this is the fair market
value (FMV) on the valuation date, though other
valuation
methods may apply. Simply stated, FMV means the price at which
property would sell for on the open market. The valuation date is either the
date of death or, if elected by your personal representative, six months after
the date of your death.
At the time of his death, Adam owned his own home with
a FMV of $200,000, furnishings and appliances with a FMV of $25,000, and a car
with a FMV of $5,000. He also had $20,000 in his bank account. Adam’s gross
estate is $250,000 ($200,000 plus $25,000 plus $5,000 plus $20,000).
Determine what isn’t taxed
The second step in the estate tax calculation is to
determine what isn’t
taxed. Certain amounts are excluded from the gross estate and
deductions are allowed to be subtracted from your gross estate. The result is
your taxable estate.
Exclusions:
The following exclusions are allowed:
- Qualified conservation easement exclusion: A limited
amount of the value of land subject to a qualified conservation easement can be
excluded from your gross estate. - Social Security benefits: Any benefits payable to your
heirs under the Social Security system are excluded from your gross estate
(unlike some life insurance or retirement plan benefits). - Workers’ compensation death benefits: Any benefits
payable to your heirs under your state’s workers’ compensation law are excluded
from your gross estate.
While the applicable exclusion amount (or basic
exclusion amount; sometimes referred to as an exemption) indicates the amount
of property that can be sheltered from federal gift or estate tax by the
unified credit, the applicable exclusion amount is not actually an exclusion
(or exemption). So do not reduce the gross estate by the applicable exclusion
amount. Instead, the unified credit is subtracted below as a credit against
tax.
Deductions:
The following deductions are allowed:
- Expenses: Certain expenses incurred by your estate can
be deducted from your gross estate. These expenses include:- Funeral expense
- Administration expense (e.g., executor’s or
administrator’s fees, court costs, attorney’s fees, appraiser’s fees) - Certain debts of the decedent
- Certain taxes
- Certain claims against your estate
- Casualty losses suffered during the administration
of your estate
- Unlimited marital deduction: The unlimited marital
deduction is one of the most significant deductions allowed. It lets you deduct
the value of property you leave to your spouse from your gross estate. Although
this deduction is unlimited, only certain property interests qualify, and
certain conditions and requirements must be satisfied.
If your spouse is not a U.S. citizen, the marital
deduction is generally not available unless you use a qualified domestic trust
(QDOT).
- Charitable deduction: The entire value of property
you leave to charity is deductible from your gross estate. The gift must be to
a qualifying organization and must be for a public purpose. Gifts to
individuals, no matter how needy, do not qualify. Certain conditions must be
met to qualify for this deduction, but the amount is not limited as it is with
the income tax deduction.
- State
death tax deduction: State inheritance or estate taxes (collectively referred to as state death taxes) paid are deductible from the gross estate.
Generally, the deduction can be claimed only if such taxes are paid within four
years after the federal estate tax return has been filed.
Taxable estate
As noted above, certain amounts are excluded from, and
deductions are subtracted from, your gross estate. The result is your taxable
estate.
This is what your calculation should look like at this
point:
Gross Estate | |
– | Deductions |
= | Taxable Estate |
Calculate tentative estate tax
The third step is calculate the tentative estate tax. For
this purpose, the taxable estate is added to your adjusted taxable gifts,
resulting in your cumulative taxable transfers.
Generally, adjusted taxable gifts are gifts made after
1976 that are not “qualified transfers” for educational or medical purposes or
transfers that qualify for the annual gift tax exclusion, marital deduction, or
charitable deduction. Generally, the value of a gift is the FMV of the property
on the date the gift is made.
A tentative tax is calculated on your cumulative taxable
transfers, as well as on your adjusted taxable gifts. The tax is calculated
under the Unified Tax Rate Schedule for gift tax and estate tax, which is
graduated. A tentative estate tax is calculated by subtracting the gift tax on
adjustable taxable gifts from the estate tax on cumulative taxable transfers.
[The gift tax on adjustable taxable gifts is calculated as reduced by the
unified credit available in the year of any gift.]
This is what your calculation should look like at this
point:
Gross Estate | |
– | Deductions |
= | Taxable Estate |
+ | Adjusted Taxable Gifts |
= | Cumulative Taxable Transfers |
Tax on Cumulative Taxable Transfers | |
– | Tax on Adjusted Taxable Gifts |
= | Tentative Estate Tax |
Deduct credits from your tentative estate tax
Once your tentative estate tax has been calculated, there
are credits available to apply against the tax.
- Unified
credit (applicable exclusion amount): The unified credit ($5,541,800 in 2025, $5,389,800
in 2024) allows you to pass an amount
referred to as the basic exclusion amount (part of the applicable
exclusion amount) free from gift and estate tax. This lifetime exclusion (which
is sometimes referred to as an exemption) effectively exempts $13,990,000 (in 2025, $13,610,000 in 2024) from
gift tax and estate tax. For 2011 and later years, the
exclusion amount is portable, that is, any exemption that is unused by the
first spouse to die may be used by the surviving spouse for gift tax and estate
tax. [Technically, the Internal Revenue Code refers to the portable unused
exemption as the deceased spousal unused exclusion amount (DSUEA).] - Credit for gift taxes paid: You are allowed to deduct
the gift tax paid on taxable gifts you included in your gross estate if the gift was made before 1977. - Foreign death tax credit: Like the state death tax
credit, the foreign death tax credit prevents double taxation. This credit is
allowed for death taxes paid to a foreign country or U.S. possession on
property included in your gross estate and situated in that country or
possession. - Credit for federal estate tax on prior transfers: If
your gross estate includes property that was transferred to you by will, gift,
or inheritance, and on which estate tax has already been paid, you may be
entitled to a credit.
This is what your calculation should finally look like:
Gross Estate | |
– | Deductions |
= | Taxable Estate |
+ | Adjusted Taxable Gifts |
= | Cumulative Taxable Transfers |
Tax on Cumulative Taxable Transfers | |
– | Tax on Adjusted Taxable Gifts |
= | Tentative Estate Tax |
– | Credits |
= | Estate Tax Owed |
What else should you know about estate tax?
Your personal representative is responsible for filing your
estate tax return and paying estate tax owed, if any. Your estate tax return
and payment of estate tax is due within 9 months after your death. An estate
will be allowed an automatic 6-month extension of time beyond the prescribed 9
months if Form 4768 is filed on or before the due date for filing Form 706. If
an estate does not file for an automatic 6-month extension, an extension of up
to 12 months can be obtained by showing reasonable cause. The IRS doesn’t
define reasonable cause, but uses its own discretion to determine whether to
grant or deny a request for an extension. The IRS may grant a series of
extensions running as long as 10 years.
If you’re a business owner, under
Section 6166,
your personal representative may be able to defer the estate tax owed on your
business interest.
If your estate owes tax, it must be paid before your
beneficiaries can receive what you have left them. The IRS will have a lien
against your estate and has the ability to seize or levy the estate property if
the tax is not paid when due.
Making special provisions in your will for paying estate
tax will ensure that your beneficiaries get what you intend for them to
receive.