Financial Education Center

The federal government has set up a tax system to collect a certain amount when you die if you leave an estate over a certain amount. This tax was originally intended to prevent extremely wealthy families from holding on to their fortunes from generation to generation instead of turning assets back to the government to help run the country. With rising real estate and pension values and more people owning life insurance policies, a lot of Americans find themselves among this "elite" group. The tax rates on estates can be as high as 40% in 2020, potentially making the federal government one of your major beneficiaries when you die with a sizable estate.

Generally, if you have more than the applicable exclusion amount ($11.58 million in 2020 and $11.4 million in 2019) in your estate, you may have to pay an estate tax. For tax purposes, your taxable estate is defined as your estate (including assets that are not part of probate, such as pensions, joint property, life insurance, and IRAs) less expenses, certain deductions, and exemptions.

IMPORTANT NOTE: If you are trustee in a trust where you can appoint assets back to yourself (or pay your creditors), the entire value of this trust may be included in your estate.

IMPORTANT NOTE: Estate taxes have nothing to do with the income taxes that you have to pay every April 15.

In determining your taxable estate, you are generally allowed to deduct any debts the estate has (excluding estate tax), any expenses paid to the executor, attorneys, or accountants in settling the estate, state death taxes (state estate, inheritance, legacy, or succession taxes), and qualified charitable donations.

Any property transferred to a spouse is deducted from your taxable estate. This is called the "Unlimited Marital Deduction." In many cases, this is how you can postpone estate tax until the surviving spouse dies. There are a few limitations on this deduction, so if you are thinking of leaving assets to your spouse in a trust or otherwise restricting his or her use of the assets, ask your attorney or other estate planning professional if you will be jeopardizing this important deduction.

IMPORTANT NOTE: The Unlimited Marital Deduction does not apply to transfers to a spouse who is not a U.S. citizen. Special rules have to be followed. If this applies to your spouse, find an attorney who is knowledgeable in this area of estate planning.

Basis Step-up

The basis of property acquired from a decedent is generally the same as the value placed on the property for federal estate tax purposes and can be the fair market value on the date of the decedent's death, an alternate valuation date if elected, or special-use valuation if elected. For example, eligible business-use property included in a family-owned or closely-held business may be valued based on the activity for which it is used rather than on its highest and best use—this is referred to as the "special-use valuation."