Should You Worry About the Estate Tax?

Short answer: Probably not.

Now, the longer answer:

As you may remember, the estate tax has been one of many hotly contested political topics the past few years. Opinions on the tax vary from a valuable tool to raise money for government by taxing those in the best position to pay it to an unfair, “second bite at the apple” death tax that destroys family farms and small businesses.

Inheritance taxes have been with us for some time, and this debate has been raging for a while. Nowadays, the various factions seem to have made some peace, and hopefully we have some stability regarding what to expect in the future (it certainly makes planning easier).

There are two key numbers involved: the estate tax exemption amount and the estate tax rate.

The estate tax exemption amount is what leads to the “probably not” at the top of this post. This exemption amount is the largest that your estate can be before you pay any tax at all. Back in 2011, the estate tax exemption amount was set at $5,000,000–meaning that only estates with a value greater than $5,000,000 would be taxed, and only for the amount that exceeded the $5,000,000 mark. The exclusion amount changes from year to year depending on inflation. For 2014, the exclusion amount is $5,340,000, and for 2015 it will be $5,430,000.

A deceased person’s taxable estate consists of “all property in which the decedent had an interest.” That includes certain gifts, annuities, portions of joint estates and community property interests, certain life insurance proceeds, property over which the decedent held a general power of appointment, and dower and curtesy (which do not exist in Missouri). Even property excluded from a probate estate is generally part of a taxable estate. Generally, everything included in the estate is valued based upon the fair market value of the property.

If the taxable estate of a deceased person is above the exclusion amount for the year of his or her death, the portion above the exclusion amount is subject to the estate tax. The estate tax rate for 2014 and 2015 is 40%. An estate tax return (Form 706) must be filed within 9 months of the decedent’s death (and you can get an additional 6-month extension). If the deceased person’s estate does not exceed the exclusion amount, no estate tax return is required.

However, even if a deceased person’s taxable estate is below the exclusion amount, it might still be worthwhile to file an estate tax return (and not just because completing tax returns is fun). If a deceased person does not use his or her full estate tax exclusion, the surviving spouse can use the unused portion of the deceased spouse’s exclusion in addition to his or her own. So, for example, let’s say that a person died in 2014 with a taxable estate of $4,000,000. The exclusion amount for 2014 is $5,340,000, so there is $1,340,000 that went unused. The surviving spouse can add that unused exclusion to his or her own exclusion; if the surviving spouse died in 2015, the spouse’s exclusion would be $1,340,000 + $5,430,000 = $6,770,000. To take advantage of this rule, an estate tax return must be filed for the deceased spouse.

Oh, and one more thing…that’s the federal estate tax. The states can also impose an estate tax. In Missouri, the state only collects an estate tax equal to the amount the federal government allows an estate to deduct as a credit for state taxes. This rule effectively kept the tax the estate paid the same, but apportioned it according to the credit the federal government gave to estates for state estate taxes. Since 2005, the federal government has not allowed an state estate tax credit, so Missouri has not charged an estate tax.

So, for most people, the estate tax is probably not much of an issue, but if you are closing in on the exclusion amount, it might be worthwhile to do some planning.

Photo credit: Flickr user Lydia, licensed under CC 2.0

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