Is my Estate Subject to Tax?

Under the federal law of the United States, your gross estate includes all property (of any description and wherever located) in which you have any interest at your death. Your adjusted gross estate is basically your gross estate less all of your indebtedness. Federal law currently imposes a tax on the value of your adjusted gross estate. This is called the estate tax. The current maximum rate of that tax is 40%.

Estate Tax ReturnFortunately, federal law also allows a significant credit against the estate tax. This credit is called the unified credit. Under current law, the amount of the unified credit exempts all but the largest estates from the federal estate tax. The maximum unified credit is currently equal to $2,125,800. This is the equivalent of $5,450,000 of adjusted gross estate (referred to as the applicable exclusion amount). In other words, under current law, a taxpayer’s adjusted gross estate must exceed $5,450,000 before he or she will owe any estate tax.

Here’s an illustration of how the federal estate tax works as applied to an adjusted gross estate of $8,000,000:1

If you are married and you leave all of your property to your spouse, there will be no estate tax on your estate. This is called the unlimited marital deduction.2 Note, however, that if you leave all of your property to your spouse, his or her estate will have increased in value by the value of your adjusted gross estate. This could cause your spouse’s estate to be subject to the estate tax. Fortunately, federal law now permits a decedent’s spouse to apply the decedent’s unified credit to reduce the value of the surviving spouse’s adjusted gross estate. This is referred to as portability. To achieve portability, the surviving spouse must file a federal estate tax return (Form 706) for the decedent to claim the decedent’s unified credit.

Another way to preserve a decedent’s unified credit is through the use of a living trust. This is usually a better alternative than portability because property valued up to the decedent’s applicable exclusion amount (and any subsequent appreciation on that property) can be excluded from the estate of the surviving spouse altogether.

Estate tax may also be payable to a state if you are domiciled in that state or own property in that state. However, for estates of decedents dying after 2004, Arizona no longer imposes an estate tax.3

We Can Help!

While federal and state death taxes may have a considerable influence on estate planning, there are many other things to think about when planning your estate. We often assist our clients with a wide variety of estate-related matters such as business succession planning, business acquisition agreements, entity selection, buy-sell agreements, deferred compensation, family business structures and planning for charitable gifts.

To take steps towards protecting your estate from unnecessary estate taxes, contact a member of our team now at 480.461.5300.