Accountancy Associates, LLC

Estate Tax: What is it? What does it include?

Most relatively simple estates (cash, publicly-traded securities, small amounts of other easily-valued assets and no special deductions or elections or jointly-held property, etc.) with a total value under $1.5 million do not require the filing of an estate tax return. However, our clients usually hold a business interest that represents a significant portion of their total estate, which pushes them beyond the $1.5 million threshold in 2005. Current tax law calls for a scaling down and eventual repeal of the estate tax in 2010. Estate tax planning is critical. Taking advantage of exemptions in addition to strategic estate planning strategies could minimize, or even prevent, the occurrence of federal estate tax for many of our clients.

What is the Estate Tax? The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death (filed on Form 706). The total of all of these items is referred to as "Gross Estate." The estate tax due is calculated at fair market value, which is not necessarily what you paid for them or what their values were when you acquired them.

When is the return due? Generally, the estate tax return is due nine months after the date of death. A six month extension is available if requested prior to the due date and the estimated tax due is paid before that date.

What is included in the Gross Estate? The Gross Estate consists of the totality of your real and personal property and your other holdings and interests. It includes the fair market value of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Generally, the fair market value at the date of death of such property and interests owned by the decedent are considered in calculating the gross estate at date of death. Keep in mind, fair market value is not necessarily the price paid at the date of purchase or acquisition. Further, discounts are available for certain farms (or businesses operated as a family farm) in arriving at their taxable value. Therefore, a professional valuation is necessary to determine the fair market value of the gross estate.

What is excluded from the Gross Estate? Generally, it does not include property owned solely by the decedent's spouse or other individuals or lifetime gifts that are complete (no powers or other control over the gifts are retained) and life estates given to the decedent by others. However, taxable gifts are included for purposes of computing estate tax.