Do You Have a Taxable Estate?

November 10, 2016

To keep pace with inflation, the IRS recently announced a higher estate tax exemption for next year of $5.49 million. For most people, this estate tax exemption means they don’t have to worry about the estate tax because it only applies to the value of estates above that amount. However, there are several main reasons why your estate may be more likely to be taxable than you think:

The estate tax applies to non-financial assets too. It’s easy to see the value of your retirement, investment, and bank accounts, but don’t forget any real estate or business interests you may have. The IRS may also value them higher than you expect.

The tax is on your gross estate. If you own a $1.5 million home with a $1 million mortgage,  you may think only your $500k of equity is part of your estate, but the entire $1.5 million is actually included. The same is true for any other property you have with secured debt.

Your estate includes life insurance proceeds. Even though you don’t see a dime of it, life insurance death benefits are included in your estate. This alone could be several million dollars for many people.

Your state may have a lower estate tax exemption. In addition to the federal estate tax, a handful of states impose their own estate tax with rates as high as 20% (Washington) and their exemptions are often lower than the federal one. For example, New Jersey’s state estate tax exemption is only $675k.

The estate tax will likely change. The tax code is constantly changing and the estate tax is no different. Depending on the outcome of future elections, we could see a higher estate tax or even no estate tax at all. Given the rising national debt and the fact that taxing upper-income people is one of the few deficit-reducing policy proposals that polls well, the former may be more likely.

Chances are, you still won’t have to worry about paying the estate tax even with all these caveats. However, if it turns out that you do have a taxable estate, you’ll want to speak with an estate planning attorney about what options you have to minimize the tax burden on your heirs. It’s a good problem to have but a problem nonetheless and one you’ll want to know about before it’s too late.