M—Federal Estate Tax

One of the potential expenses of settling larger estates is the federal estate tax. It is a continuous lien on your client’s property, but its foreclosure date is yet to be determined. Proper planning involves anticipating and reducing the estate tax liability wherever possible as well as providing for payment of the tax. Unlike other expenses of settling an estate, it can be particularly burdensome in that it is generally due and payable in cash nine months after death.

The estate tax computation is not difficult, and in many ways resembles the calculations involved in determining income tax. When we file our income tax return each year, the calculations involve terms such as gross income, taxable income, deductions, and credits.

When an estate tax return is filed, we are likewise dealing with terms such as gross estate, adjusted gross estate, taxable estate, deductions, and credits.

Generally, the gross estate includes all property of any description and wherever located, to the extent the decedent had any interest in the property at the time of death. It may even include property previously given away or over which the decedent had no control at the time of his death.

To illustrate, assume that in 2025 we have an unmarried individual with an estate totaling $15,000,000. In determining the adjusted gross estate, we can subtract the decedent’s debts, such as loans, notes, and mortgages, plus the debts of the estate, such as funeral and administrative expenses. If these debts totaled $500,000, then the adjusted gross estate would be $14,500,000. For this discussion, assume that the taxable estate is also $14,500,000. With a taxable estate of $14,500,000 the tentative tax would be $5,745,800.

However, in 2025 there is an estate tax unified credit available which can offset up to $5,541,800 of the tentative tax. Generally, the unified credit allows an individual to pass $13,990,000 of property free of federal estate taxes upon death.

After taking advantage of the credit, the estate will still owe a tax of $159,500, which means that the amount of the original estate remaining for the children or other heirs has been reduced to $14,340,500.