The Estate Tax is a tax on the transfer of property upon your death. It consists of an accounting for everything you own, including business interests which must be valued, at the date of your death. The IRS and most states require that FMV is used to value the items. The decedents tax basis is not relevant as the estate is “grossed up” to fair market value and the amount of the bequest is taxed. The sum of everything you your estate owns, all of your assets acquired during life and owned at your death, are call the “Gross Estate.” The items included will be comprised of all your assets including cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
Once your CPA has determined the value of your gross estate, certain deductions are allowed in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, executor fees, estate administration expenses, property that passes to surviving spouses (such as community property in California) and qualified charitable deductions.
After the net estate amount is calculated, the value of all the lifetime TAXABLE gifts you have made (beginning with gifts made in 1977) is added to this number and the tax is then calculated. The unified credit is then applied to the estate tax. Ryan Jarus, CPA of Jarus & Co in Irvine, CA notes: “All taxpayers who are required to file an estate tax return should seek out a CPA with knowledge of the estate tax, the current federal exclusion, and most importantly the application of the unified credit.”
The average estates of a decedent includes cash, securities, small amounts of property with defined value, and no special deductions or elections. As such most estates do not require the filing of an estate tax return. A filing is required ONLY FOR ESTATES WITH COMBINED GROSS ASSETS AND PRIOR TAXABLE GIFTS EXCEEDING $1,500,000 in 2004 – 2005; $2,000,000 in 2006 – 2008; $3,500,000 for decedents dying in 2009; and $5,000,000 or more for decedent’s dying in 2010 and 2011 (note: there are special rules for decedents dying in 2010); $5,120,000 in 2012 and $5,250,000 in 2013.