When estate planning, knowing how your gifts could affect your inheritors’ taxes may affect your decisions. This article will examine some common tax considerations that may affect how you structure your estate planning.
Thresholds for a required federal estate tax return
The IRS stipulates that if the gross estate value of the deceased is valued at a certain threshold at the time of their death, after the standard adjustments and exemptions, Form 706 must be completed. The IRS Estate Tax Exemption threshold for 2023 is $12,920,000 for an individual or $25,840,000 for a married couple.
Gross estate defined
The gross estate includes the value of any cash, real estate, trust assets, insurance values, business values, and other assets held at the time of death. The fair market value of the assets at the time of evaluation is used to determine the exact gross estate value.
Gross estate exclusions
The gross estate usually does not include any property that another individual, such as a surviving spouse, also owns. In addition, complete lifetime gifts and anything included in a life estate that the deceased no longer had any control over at the time of their death are excluded.
Estate tax deductions
The IRS lists five common deductions that should be considered as part of your estate planning:
1) Marital Deduction: all property that was part of the gross estate but transfers into the possession of a surviving spouse outright is eligible for an estate tax deduction.
2) Charitable Deduction: a donation made as part of the distribution of the estate to a qualifying charity is eligible for a deduction from the gross estate.
3) Estate administration expenses: any expenses incurred as a direct part of the administration of the estate can be deducted, such as executor fees and court fees.
4) Estate Losses: any casualty losses that occur during the estate administration qualify for a specific deduction.
5) Mortgages and debts: any mortgages and debts that were factored into the gross estate also qualify for a deduction.
Tax considerations for the sale of inherited property
If you expect a piece of property to be sold as part of the estate, know that the IRS stipulates that capital gains or losses from the property are counted from its value on the day of death. This condition means that if a piece of property is sold shortly after being transferred, there likely will not be a significant taxable gain.
Planning for estate taxes and understanding how IRS policies influence the value of your gift to your inheritors is essential. An attorney experienced in complex estate planning can help you plan for any factors that may affect your estate’s value and give you peace of mind that your inheritors will be well-prepared and cared for.