Understanding Gross Estate Tax: Everything You Need to Know
Death and taxes are the only two certainties in life, as the old saying goes. Luckily for most of us, while we can’t avoid either of these things, we can prepare for them. One way we prepare is by understanding what taxes we might owe after we pass away. One such tax is the Gross Estate Tax, a federal tax on the value of someone’s property and assets at the time of their death.
What is Gross Estate Tax?
The Gross Estate Tax is a federal tax on all property and assets a person owns at the time of their death. This includes cash, stocks, bonds, insurance policies, real estate, and anything else of value. The tax is applied based on the fair market value of these items at the time of the person’s death. Put simply, it’s a tax on everything someone owns when they die.
Who is responsible for paying the tax?
The executor of the deceased person’s estate is responsible for paying the Gross Estate Tax. The executor is typically named in the deceased person’s will, and they are responsible for distributing the estate’s assets to the appropriate beneficiaries. Before this can happen, however, any taxes owed must be paid first.
How much is the tax?
The Gross Estate Tax is calculated based on the total value of the deceased person’s estate. For estates valued at less than $11.7 million, no tax is owed. For estates valued over this amount, the tax rate is a flat 40%. So if someone’s estate is valued at $20 million, they would owe $3.3 million in Gross Estate Tax.
It’s worth noting that, while the current threshold for estate taxes is high, it has not always been this way. In fact, the threshold has varied greatly over the years. In 2017, the threshold was $5.49 million, meaning estates valued at less than this amount were not subject to the tax. However, the Tax Cuts and Jobs Act, signed into law in December 2017, raised the threshold to its current level of $11.7 million.
Are there any deductions or exemptions available?
Yes, there are several deductions and exemptions available that can help lower the amount of Gross Estate Tax owed. These include:
– Unlimited marital deduction: Spouses are allowed to transfer an unlimited amount of assets to each other without incurring any Gross Estate Tax. This means that if one spouse passes away, their entire estate can be transferred to the surviving spouse tax-free. When the surviving spouse passes away, their estate would then be subject to the tax, assuming it is valued above the threshold.
– Charitable deduction: If part of the estate is left to a qualifying charity, that amount can be deducted from the total value of the estate before calculating the tax owed.
– State inheritance taxes: Some states have their own inheritance tax, which is separate from the Gross Estate Tax. If the estate is subject to both taxes, the amount paid in state inheritance tax can be deducted from the amount owed in Gross Estate Tax. Note that not all states have an inheritance tax.
– Annual gift exclusion: Individuals are allowed to gift up to $15,000 per year to another person without incurring any tax. This means that if someone gifts $15,000 or less to someone else during their lifetime, that amount can be deducted from the total value of their estate before calculating the tax owed.
It’s important to note that these deductions and exemptions can be complex, and it’s wise to consult with a tax professional to ensure they are being applied correctly.
When is the tax due?
The Gross Estate Tax is due nine months after the date of the deceased person’s death. If the executor needs more time to file and pay, they can request an extension of up to six months. However, interest will be charged on any amount owed after the original due date, so it’s generally best to file and pay as soon as possible.
What happens if the tax isn’t paid?
If the Gross Estate Tax isn’t paid on time, interest and penalties will accrue. Interest is charged on the amount owed, while penalties can be assessed for late payment and failure to file. In some cases, the IRS may place a lien on the estate’s assets in order to ensure payment. It’s important to note that the executor of the estate is personally liable for paying any taxes owed, even if they have already distributed the estate’s assets to beneficiaries.
Conclusion
While no one likes to think about estate taxes or death, understanding the Gross Estate Tax is an important part of planning for the future. By knowing who is responsible for paying the tax, how much it might be, and what deductions and exemptions are available, individuals can better prepare for what will happen to their assets after they pass away. And for those who are in the position of managing someone else’s estate, taking the time to learn about the Gross Estate Tax can help ensure that everything is handled correctly and that any taxes owed are paid on time.
The Gross estate tax is a tax imposed on the total value of an estate on the day that the benefactor passes away. The estate tax is generally imposed on the total value of an estate, regardless of what beneficiary inherits the property. Gross estate taxes are imposed on the estate, before an individual inherits all of, or a portion of an estate.
Once the estate has been inherited, the beneficiaries may also be responsible for individual inheritance taxes based on the value of their specific inheritance. Although, most states no longer impose an inheritance tax. The Federal government does impose an estate tax on the total value of an estate before it is divided between the beneficiaries.
There are modifications available to reduce a gross estate tax burden. Those modifications can include a reduction for the value of an estate held by another party, such as a surviving spouse. In addition, the value of a portion of the estate that was disbursed prior to death, may also be used to reduce a gross estate tax. Those that take possession of any portion of the estate, prior to the death of the benefactor through a life estate, are responsible for a tax burden that is separate from that of the estate tax.
There are also special laws that govern portions of an estate in which a surviving spouse is entitled to through rights of survivorship. Rights of survivorship differ in each state and can be dependant on the marriage laws in that state. For Federal tax purposes, rights of survivorship only apply to opposite sexed married couples due to the Defense of Marriage Act. Even same sex couples that are legally married in their state of residence, will find estates taxes at the gross estate tax rate because under federal law, their marriage is not legal.
There are other exceptions that may allow those estates to escape the gross estate tax such as a spouse owning a portion of, or having a legal interest in part of the estate. Regardless of whether the Federal government recognizes that marriage, the legal rights of ownership will still apply.
There are many ways that a gross estate tax can be legally manipulated. Estate planning should always include a review of tax laws that would apply to the gross estate value. Â Estates that will not incur an inheritance tax in some states, will still be subject to the Federal estate tax. The total value of inherited property will be reduced once the gross estate tax has been paid.
