If you are serving as the Executor of an estate, you have numerous duties and responsibilities. Among those are determining if the estate owes federal gift and estate taxes and if so, making sure the taxes are paid correctly and on time. To help you avoid making a mistake, the Grand Forks probate attorneys at German Law discuss calculating and paying federal gift and estate taxes.
Estate Administration Basics
Probate is the name given to the legal process involved in administrating the estate of a decedent. If the decedent left behind a valid Last Will and Testament, the person named as the Executor in that Will is responsible for administering the estate.
How Do I Determine If Federal Gift and Estate Taxes Are Owed?
Determining what assets are included when calculating a decedent’s estate value can be tricky if the decedent left behind a high-value and/or complex estate. Consulting with an experienced probate attorney is the best way to avoid making a mistake when determining an estate’s tax liability. To get you started, however, value the decedent’s gross estate and then subtract any credits, exemptions, or deductions. The decedent’s gross estate typically includes all the following:
- All property in which the decedent had an interest (including real property outside the U.S.)
- Certain transfers made during the decedent’s life without adequate consideration
- The includable part of joint estates with rights of survivorship
- The includable part of tenancies by the entirety
- Certain life insurance proceeds
- Property over which the decedent had a general power of appointment
- Dower or curtesy (or statutory estate) of the surviving spouse
- Community property in which the decedent had an interest
What Is the Federal Gift and Estate Tax?
The federal gift and estate tax is a federal tax on the transfer of wealth paid at the time of the death of a taxpayer. The tax applies to the value of the estate at the time of death plus the value of all qualifying lifetime gifts. While there are some exclusions, most gifts are subject to the federal gift tax. The rate of the federal gift and estate tax is 40 percent; however, a taxpayer is entitled to take advantage of the lifetime exemption to reduce the amount of taxes owed. The American Taxpayer Relief Act of 2012 (ATRA) set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, tax legislation was signed into law that changed the lifetime exemption amount until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. As of 2022, the individual lifetime exemption amount is $12.06 million.
How to Pay Federal Gift and Estate Taxes
If you determine that the estate owes federal gift and estate taxes, you can use IRS Form 706 or 706-GS(D) to help you calculate the estate tax owed, according to Chapter 11 of the Internal Revenue Code (IRC), and to calculate the generation-skipping transfer (GST) tax imposed by Chapter 13 of the IRC. Form 706 must be filed on behalf of a deceased U.S. citizen or resident whose gross estate, adjusted taxable gifts, and specific exemptions exceed the applicable lifetime exemption. A Form 706 is also required if the Executor elects to transfer the “deceased spousal unused exclusion” (DSUE) amount (commonly known as electing “portability”) to the surviving spouse, regardless of the size of the decedent’s gross estate. Form 706-NA is used to calculate estate and GST tax liability for decedents who were classified as “non-resident aliens.” Form 706-GS(D) is used to calculate taxes due on trust distributions subject to the generation-skipping transfer tax.
Contact the Grand Forks Probate Attorneys
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to calculate or pay federal gift and estate taxes, contact the Grand Forks probate attorneys at German Law by calling 701-738-0060 to schedule an appointment.