What is the estate tax and how do I know if I'll be subject to it?

We are taxed when we earn income (income tax), when we buy things (sales tax) when we own real estate (property taxes), and when we liquidate investments (capital gains Tax). And then there is that final tax, the Estate Tax (or Death Tax).

An estate tax is a tax imposed on property transferred by will or intestate succession after the death of the property owner.

An estate tax differs from an inheritance tax, which is imposed on the person who inherits the property (rather than on the property itself). Therefore, in an inheritance situation, both the property and the beneficiary may be subject to tax.

An estate tax also differs from a gift tax, which is a tax imposed upon a gratuitous and voluntary transfer or property. Under federal law, the gift tax is imposed upon the donor, but in some states the recipient is also taxed.

To read more about gift taxes, click here.

Under the federal estate tax, your “taxable estate” portion of your gross probate estate is subject to tax. The gross probate estate is the total value of the all the property in which you hold an interest at the time of your death.

Also, if you choose to create a “generation skipping transfer” or “generation skipping trust” (for example, to transfer property to your grandchildren), you can decrease the value of your taxable estate. However, you may be subject to a generation-skipping transfer tax.

If you live in Michigan and need experienced estate planning help, contact Michael Einheuser for a free consultation. Michael helps families in Bingham FarmsTroyFarmington HillsRochester HillsSouthfieldWest Bloomfield TownshipBloomfield Township, and the surrounding Michigan areas.

Schedule your Free Consultation today: (248) 398-4665.

How Do I Know If I Will Be Subject to the Estate Tax?

Under the federal estate tax, there are basic steps that must be taken to determine the “taxable estate.”
(1) determine the value of the property is your “gross estate”
(2) subtract from the “gross estate” any allowable deductions to arrive at the “taxable estate”

Gross Estate

Your gross estate includes the value of all property in which you had an interest at the time of death. Your gross estate also includes the following if payable to your estate or heirs:
1) Life insurance proceeds
2) The value of annuities
3) The value of property you transferred within three years before your death
4) Trusts over which you have power

Taxable Estate

The allowable deductions used in determining your taxable estate include:
1) Funeral expenses paid out of your estate
2) Debts you owed at the time of death
3) The marital deduction (the value of the property that passes from your estate to your spouse)

Once the value of the taxable estate is known, your executor or trustee will determine whether the estate is subject to an estate tax. Fortunately, the thresholds for the estate tax have grown significantly over the past 10 years.

The American Taxpayer Relief Act (ATRA) dated 1/2/2013 raised the amount an individual can leave to heirs tax-free to $5.45 M in 2016.

To see a table of estate tax rates, click here.

Which Estate Tax Forms Should my Executor File?

In order to pay the federal estate tax after your death, your executor must file on your behalf a U.S. 706 form.

The executor must also file a state estate tax form, either a MI-706 (or MI-706-A), if you were a Michigan resident or a nonresident with real or tangible personal property located in Michigan.

In Michigan, the inheritance tax was eliminated in 1993 and replaced with an estate tax. Michigan's estate tax is equal to the maximum federal credit allowable for state death taxes.

The Michigan estate tax is a lien on the gross value of the estate until the tax is paid in full. If personal property is sold, the lien attaches to the income received from the property.

If the executor or trustee of your estate makes a distribution of any of the property
subject to a transfer tax without paying the tax due or obtaining the necessary estate tax lien release for the real property, the executor or trustee will become personally liable for the tax, penalties and interest due.

To learn about the History of Estate Taxes, click here.

Return from the Estate Tax article to the home page by clicking here.

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