Estate Planning & Taxes


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When you die, you want to be sure that your estate goes to your desired beneficiaries. Estate planning is the process of naming those beneficiaries and managing the tax consequences of passing your wealth to those institutions or individuals. If your estate exceeds a certain value, you owe estate taxes.

To administer your estate, you may wish to establish a will or trust (A trust is an agreement where you as grantor or executor designate a trustee and beneficiary.). Otherwise, you will die intestate, which requires that your estate go through probate. Probate is a relatively expensive and time-consuming process that requires a state court to approve distributions from your estate.

You owe estate taxes on the value of your estate that exceeds the applicable exclusion limit. The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually lowered the maximum estate tax rate, from 55% to 45%, repealing the tax for one year in 2010. The Tax Relief Act passed in late 2010 reinstated the estate tax for 2010 through 2012. For 2010, the Act provided for an election out of the estate tax system for those estates that would benefit from electing out. The decision regarding the election depended in part on the size of the estate and the cost basis of the assets within the estate. The exclusion limit and maximum tax rate were scheduled to revert back to 2001 levels in 2013. The American Tax Relief Act of 2012 set the exclusion limit to $5 million and the maximum estate tax rate to 40%. The exclusion amount is adjusted for inflation. The Tax Cuts and Jobs Act of 2017 doubles the estate and gift tax exclusion for tax years 2018 through 2025 and is $11.18 million for 2018.

If the value of your estate exceeds the applicable exclusion limit in the year of your death, you must file IRS Form 706. There may also be other reasons to file Form 706 particularly if you are a surviving spouse. Generation-skipping tax may be due on any property left to grandchildren or great-grandchildren.

For 2010 through 2011, the estate tax exclusion amount was set at $5 million and the estate tax rate was 35%. For 2012, the estate tax exclusion amount was adjusted for inflation up to $5.12 million. For 2018, the inflation adjusted exclusion limit was doubled and is $11.18 million and maximum tax rate is 40%. The following table shows applicable exclusion limits and maximum tax rates through 2018. Future tax-law changes may affect these figures:

YearApplicable Exclusion LimitMaximum tax rate
2005$1.5 million47%
2006$2 million46%
2007$2 million45%
2008$2 million45%
2009$3.5 million45%
2010Repeal of estate tax/$5 million35%
2011$5 million35%
2012$5.12 million35%
2013$5.25 million40%
2014$5.34 million40%
2015$5.43 million40%
2016$5.45 million40%
2017$5.49 million40%
2018Tax Reform/$11.18 million40%

The current state of the estate tax law may make estate planning even more complex than it already can be. For one thing, the estate tax has had several changes over the past few years and may have additional changes in the future. Other aspects of estate planning include:

  • Unexpected events. In the event you are impaired from a disease or accident, you may wish to arrange for key financial decisions to be made on your behalf. You can establish a living will, power of attorney agreement, or revocable living trust.
  • Marital deduction. The marital deduction allows you to transfer to your spouse the entire value of your estate free of estate taxes. The marital deduction is a tax-deferral rather than tax-avoidance strategy. When the surviving spouse dies, his or her estate (the combined value of both estates) may be liable for estate taxes.
  • Gifting. In 2018, you can give up to $15,000 to each individual or an unlimited amount to a charitable organization in a year without paying gift taxes. (The recipient of the gift is not liable for gift tax and the donor does not pay taxes on gifts at or below the yearly limit of $15,000.) There is no yearly limit for qualified educational or medical expenses paid directly to the educational or medical institution. Gifting lowers the value of your estate and distributes your wealth while you are living. Gifts made to charitable organizations may be tax-deductible, but gifts to your heirs are not tax-deductible.
  • Unified tax credit. The unified credit is a cumulative tax credit. If you give more than $15,000 to an individual in a year, taxes owed on amounts that exceed the $15,000 per-person limit are subtracted from your unified credit. To record gifts in excess of the yearly limit, complete IRS Form 709, which is the sister of Form 706. (Form 706 is for estate tax and Form 709 is for gift tax.)

    The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

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