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When clients discuss their tax and financial matters with their CPAs and other advisors, they’ll often hear the term “estate tax exemption”.  Many are not familiar with the term, even though they may have heard it frequently.  While we all deal annually with income tax, not everyone has to deal with the estate tax.  What is the estate tax, and the estate tax exemption-and how does it work?

The estate tax is a tax that is levied on the transfer of property at death.  You’ll often hear it referred to as the “death tax”.  While it’s frequently called that, it’s not a tax on death-it really is a tax on the transfer of property from the decedent to their heirs, based on the value of the property held by the decedent at the date of death.  The executor of the decedent’s estate is responsible for determining the assets held by the decedent at death and must also determine the value of those assets.  If the value of the decedent’s estate exceeds the exemption level, then the executor must file a federal estate tax return for the decedent-due nine months after death.  The estate tax is payable at the time the estate tax return is filed, if it is determined that the decedent’s estate exceeds the estate tax exemption amount.  If the estate is determined to be below the estate tax exemption amount, then the estate tax generally will not apply to the decedent’s estate.

Now that we know what the estate tax is, and know that we must be concerned with it if the estate’s value exceeds the exemption amount, what is the current estate tax exemption?  It’s been a hot topic over the last few years.  For many years, the exemption was $600,000-so many estates were subject to tax.  Over time, the exemption increased, and was at $5,000,000, indexed for inflation, through 2017.  The Tax Cuts and Jobs Act of 2017, passed last December, increased the estate tax exemption to $10,000,000 for each individual, indexed for inflation.  For 2018, the indexed exemption amount is $11,180,000, and it’s scheduled to increase to $11,400,000 on January 1, 2019.  Note that the exemption level is per individual-so a married couple can effectively shelter double the exemption amount (almost $23 million in 2019).  The current estate tax exemption is set to sunset on January 1, 2026, at which time the exemption will revert back to the $5 million level it was before the 2017 Act.  It’s also important to remember that the law could be changed at any time before the sunset date-so it’s important to monitor it for changes.

What assets need to be considered or included when we’re determining the value of an estate, to see if it exceeds the estate tax exemption amount?  It’s basically everything the decedent owned or had an interest in, and includes the following:

  • Real estate-the decedent’s home, rental property, other real property held for investment-all real property held, including fractional and joint interests.
  • Cash and notes.
  • Marketable securities-stocks and bonds and similar interests.
  • Interests in closely-held businesses-corporations, partnerships, LLCs-at the fair market value at date of death. (The executor must determine the value of such business interests, and that valuation can be a complicated and sometimes controversial process-that’s another subject.)
  • Retirement accounts-IRAs, 401(k)s, etc.
  • Personal property, including household goods, automobiles, jewelry, furniture. This would also include collectibles-artwork, coins, stamps, guns, etc.
  • Interests in certain other assets, depending on how the asset and ownership is structured, such as life insurance, trusts established by the decedent or in which the decedent held a beneficial interest, gifts in which the decedent retained an interest, among others.
  • Gifts made during the decedent’s lifetime in excess of the annual exclusion amount.

Once the value of the gross estate has been determined, it’s then reduced by the allowable deductions, which include the decedent’s mortgages and liens and other debts outstanding at date of death; expenses incurred in administering the decedent’s estate; charitable bequests outlined in the decedent’s estate documents; and bequests to the decedent’s surviving spouse.  If the net taxable estate exceeds the estate tax exemption in effect at the date of death, the decedent’s estate will be subject to estate tax at the applicable rate, currently 40%.

The information presented above applies to the federal estate tax.  It’s important to also know what the estate tax law is in the state in which you reside.  Many of our clients are residents of Virginia and West Virginia-and there’s good news for them, because neither of those states has a state estate tax.  However, that’s not the case for all states.  Many still have an estate tax-and a number of them levy the estate tax on taxable estates at levels far below the current federal exempt amount.  Be sure to review the applicable state laws as you work with your estate planning.

Assisting with estate planning is one of the more complex and important areas in which we assist clients, and it’s important to remember that, even if your estate is currently below the estate tax exemption amount, there are still things to consider.  The value of your estate can increase; the exemption amount is scheduled to decrease in 2026 (and could decrease prior to that); and there are many nontax factors that need to be considered as you plan your estate.  Members of YHB’s Family Legacy Team welcome the opportunity to assist you as you look at these important matters.


About the Author

Gregory Crawford, CPA, CVA, has been delivering accounting and advisory services that exceed client expectations for more than 30 years. He joined Yount, Hyde & Barbour in 1986 and has had significant experience in business valuation, litigation support, and tax and estate planning, with a focus on family business owners. Greg currently oversees YHB’s Tax Quality Control Committee as well as the Business Valuation Team.