How Are Federal Gift and Estate Taxes Paid?

When a loved one passes away, a family member or close friend is usually responsible for handling the administration of the decedent’s estate. Trying to juggle the practical duties involved in administering an estate with the emotional impact of the loss of a loved one can be difficult. A common concern people have when administering an estate concerns federal gift and estate taxes and how to pay that tax if it is owed. The Knoxville probate attorneys at Stivers Law explain how federal gift and estate taxes are paid.

Probate Basics

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. If the decedent died intestate (without a Will), the court will appoint a Personal Representative (PR) to oversee probate. The Executor/PR 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.

Understanding Federal Gift and Estate Taxes

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. While there are some exclusions, most gifts are subject to the federal gift tax. The federal gift and estate tax rate 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 2017 levels, adjusted for inflation. For the tax year 2023, the individual lifetime exemption amount is $12.92 million.

Federal Gift and Estate Tax Forms

If you are the Executor/PR of an estate 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. 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.

How Do I Calculate the Decedent’s Estate Value?

Determining what assets are included when calculating a decedent’s estate value can be tricky if the decedent left behind a valuable and/or complex estate. 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

Contact Knoxville Probate Attorneys

For more information, please join us for an upcoming FREE webinar. If you have additional questions or concerns about how to pay federal gift and estate taxes, contact the experienced Knoxville probate attorneys at Stivers Law by calling (305) 456-3255 to schedule an appointment.

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