What You Need to Know About Taxes and Estate Planning

Benjamin Franklin is often credited with coining the expression that “in this world nothing can be said to be certain, except death and taxes.” Indeed, the former does not necessarily end the latter. Even after death, the federal government may assess certain taxes against a deceased individual’s property—but proper estate planning can reduce or eliminate many of these obligations.

What Is the Estate Tax?

You have probably heard the phrase “estate tax” (or the more politically charged “death tax”) mentioned in the news without understanding its precise meaning. Basically, the estate tax is a federal levy “on your right to transfer property at your death,” according to the Internal Revenue Service. The estate tax is calculated as a percentage of a deceased taxpayer’s “gross estate,” i.e. their assets less certain deductions.

The gross estate is normally based on the date of death value of the decedent’s assets. For example, if the decedent purchased a house for $200,000 in 2006, and that same property had an appraised market value of $350,000 when the decedent died in 2016, the latter value is the basis for calculating the gross estate.

The federal estate tax itself can be quite steep. The maximum rate is 40 percent. Fortunately, few estates every pay that much. In fact, the overwhelming majority of estates—approximately 998 out of every 1,000, according to the Center on Budget and Policy Priorities—will ever owe any estate tax at all.

In addition to the federal tax, some states also assess their own estate or inheritance taxes. Michigan does not. The state abolished its own estate tax as of January 1, 2005.

Estate Tax Exemptions

The reason for this is that federal law exempts a certain amount of the gross estate from tax. For individuals who pass away in 2016, this exemption is $5.45 million. That means every person in the United States is free to pass along $5.45 million in assets without paying a cent in estate tax.

The exemption is even more generous for married couples. All property left to one spouse by the other is tax-free. Additionally, a surviving spouse may take advantage of any unused portion of a deceased spouse’s exemption. In plain terms, if Spouse A dies and leaves his entire estate to Spouse B, when she dies her estate can claim not only her $5.45 million exemption, but also Spouse A’s unused $5.45 million exemption, for a total exemption of $10.9 million.

Need Advice From a Michigan Estate Planning Lawyer?

In addition to spousal gifts and exemptions, there are other methods individuals can use to reduce potential estate tax liability. One common technique is to leave money to charity, either through a structured gift to an existing organization or by establishing a tax-exempt charitable foundation. Gifts to IRS-recognized charities are excluded from a decedent’s gross estate for tax purposes.

While the estate tax will only affect a handful of Michigan families, you may still have questions or concerns. If you need to speak with a qualified Grand Rapids estate planning attorney, contact the Law Offices of David L. Carrier, P.C., today.