What Taxes Might an Estate Need to Pay?
An estate may need to pay several taxes, including federal and state transfer taxes. Federal transfer taxes include the federal gift tax, the federal estate tax, and the generation-skipping transfer (GST) tax. State transfer taxes include an estate tax and an inheritance tax. Other taxes that may apply to estates include federal and state income taxes and state intangibles taxes.
For estate tax purposes, all property that the decedent owned constitutes the taxable estate. A taxable estate therefore includes property owned jointly or in a revocable trust. A taxable estate also includes property payable to a person or to the probate estate as a result of the decedent’s death.
Transfer taxes for an estate
Transfer taxes are taxes levied on the value of property as it passes from one person to another through gift or inheritance. Some transfers that are not considered taxable gifts include these:
Annual exclusion gifts: Gifts that are limited to the annual exclusion amount (the amount which can be transferred without incurring gift tax per year).
Gifts to a spouse: You may give an unlimited amount to your spouse, provided your spouse is a U.S. citizen. If your spouse isn’t a citizen, check the current exclusion amount.
Tuition and medical expenses paid for someone else: You must write the checks directly to the school or the hospital, not the person who will benefit.
Gifts to political organizations.
Gifts to qualified charities: Qualified charities have IRS tax-exempt status.
Federal transfer taxes
The federal gift tax is a tax on the transfer of property from one person to another without full payment in return.
The federal estate tax is a tax on the transfer of property at death. All property the decedent owns at death is subject to the tax, if it exceeds the current exemption amount. The federal estate tax has been an item of debate in the U.S. Congress, so check the current applicable laws.
The generation-skipping transfer (GST) tax is intended to ensure that the gift tax and estate tax cannot be evaded by skipping a generation on the transfer.
Here are some key points about the generation-skipping transfer tax:
Transfers made into irrevocable trusts created before September 25, 1985, which are grandfathered from the GST.
There’s a $1,000,000 lifetime exemption from the GST tax, which can be applied to transfers by gift and at death.
A transfer of property to a grandchild is considered a direct skip and is subject to the GST tax unless the grandchild’s parent has already died at the time of the transfer.
If property is left in trust for life for a child, at the child’s death one of the following will apply:
An estate tax payable because the child had enough control over the trust for it to be included in his or her taxable estate
A GST tax payable, because the terms of the trust are restrictive enough that the property is not considered to be owned by the child
The GST tax also applies to transfers to or for an unrelated person who is 37-1/2 years or more younger than the transferor.
State transfer taxes
The estate tax system varies from state to state, so check the laws that apply in the decedent’s state. Some states also have an inheritance tax, which taxes the amount inherited by a particular beneficiary. The tax is payable by the beneficiary, although some decedent’s wills may provide that the estate is to pay all inheritance taxes.
Other taxes on estates
In addition to transfer taxes, these other taxes apply to estates:
Federal income tax for decedent and estate: You must file the decedent’s final federal income tax return, as well as an income tax return for the estate for every year it’s in existence.
State income tax for decedent and estate: If the decedent lived in a state that has an income tax, you must file a final state income tax return for the decedent and an estate state income tax return each year the estate is in existence.
State intangibles tax: If the decedent lived in a state which has an intangibles tax on stocks, bonds, and other intangible assets, and if he or she had intangible assets, you must file the decedent’s final intangibles tax return. You may also find prior year returns for the decedent that were never filed and that must be filed to close the decedent’s estate. Check with your local probate court for specific requirements.