When a loved one passes away, the person appointed as the Executor in the decedent’s Last Will and Testament has several important responsibilities during the administration of the estate. One of those responsibilities is to determine whether the estate owes federal gift and estate taxes, and if so to pay them. To help you fulfill your role as Executor, the Indianapolis probate attorneys at Frank & Kraft offer some practical information related to paying federal gift and estate taxes.
Understanding Probate
Probate is the name given to the legal process involved in administrating the estate of a decedent. If the decedent left behind a valid Last Will and Testament, the person named as the Executor in that Will is responsible for administering the estate. The Executor has a wide variety of duties and responsibilities during probate. Among those responsibilities is calculating and paying any federal gift and estate taxes owed by the estate.
What Is the Federal Gift and Estate Tax?
The federal gift and estate tax is a federal tax on the transfer of wealth paid at the time of the death of a taxpayer. The tax applies to the value of the estate at the time of death plus the value of all qualifying lifetime gifts. The rate of the federal gift and estate tax is 40 percent; however, a taxpayer is entitled to take advantage of the lifetime exemption to reduce the amount of taxes owed. The American Taxpayer Relief Act of 2012 (ATRA) set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, tax legislation was signed into law that changed the lifetime exemption amount for 2018 and for several years thereafter. Those exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. As of 2022, the individual lifetime exemption amount is $12.06 million.
How Are Federal Gift and Estate Taxes Calculated?
Determining what assets are included when calculating a decedent’s estate value can be tricky if the decedent left behind a high value and/or complex estate. You start with valuing the decedent’s “gross estate” and then subtracting any credits, exemptions, or deductions. Generally, the decedent’s “gross estate” includes all the following:
- All property in which the decedent had an interest (including real property outside the U.S.)
- Certain transfers made during the decedent’s life without adequate consideration
- Annuities
- The includable part of joint estates with rights of survivorship
- The includable part of tenancies by the entirety
- Certain life insurance proceeds
- Property over which the decedent had a general power of appointment
- Dower or curtesy (or statutory estate) of the surviving spouse
- Community property in which the decedent had an interest
How Do I Pay Federal Gift and Estate Taxes?
Part of an Executor’s job is to determine if estate taxes are due and pay them if they are. To do that, you will use IRS Form 706 or 706GS(D) to calculate estate tax owed, according to Chapter 11 of the Internal Revenue Code (IRC), and to calculate the generation-skipping transfer (GST) tax imposed by Chapter 13 of the IRC. A Form 706 must be filed on behalf of a deceased U.S. citizen or resident whose gross estate, adjusted taxable gifts, and specific exemptions exceed the applicable lifetime exemption. A Form 706 is also required if the Executor elects to transfer the “deceased spousal unused exclusion” (DSUE) amount (commonly known as electing “portability”) to the surviving spouse, regardless of the size of the decedent’s gross estate. Form 706-NA is used to calculate estate and GST tax liability for decedents who were classified as “non-resident aliens.” Form 706-GS(D) is used to calculate taxes due on trust distributions subject to the generation-skipping transfer tax.
Contact Indianapolis Probate Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to calculate or pay federal gift and estate taxes, contact the experienced Indianapolis probate attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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