The Estate Tax. What is it?

One reason to create a family wealth transfer plan is to avoid the estate tax. However, at its present state, the estate tax does not affect many Americans. Regardless, knowing about it ahead of time can prepare you in the event that your assets become affected by it.

 The estate tax, simply put, is a tax on property that transfers at the time of your death. In a similar but not identical process to determining your probate estate, the assets in your name are added up including personal items, cash, real estate, stocks, insurance, and anything else that you owned at the time of death. The total value of all these items is called your Gross Estate. Once you have the number for your Gross Estate, you then subtract your estate tax deductions. These deductions include those resulting from planning or administration expenses.

After the deductions are added up, a credit called the unified credit is applied to the remaining estate. The unified credit permits a person to gift a certain amount of there assets without having to pay estate, gift, or generation-skipping taxes. The amount of this credit for 2016 is $5.45 million.

So, if your estate is well under $5.45 million, you don’t need to worry about anything considering the estate tax, right? Well, that’s incorrect. If you’ve already used up a portion of your credit for gifts during the course of your life, you may still be required to fill out a return and consider them in computing your tax.

 The information in this article concerns the federal estate tax. Many states also have their own version of the estate tax. As of this writing, the Ohio estate tax has been repealed and is no longer on the books. However, it could always be reintroduced.

 Only the top 2% of the population will have to deal with the federal estate tax. Regardless, understanding the estate tax, how it functions, and what needs to be done to maximize your generational wealth can provide you value when it comes to constructing a family wealth plan. Similarly, knowing its current iteration can provide you some guidance when changes are proposed to it that could affect you and your family in the future.