Estate Tax

Definition of "Estate tax"

Written by

Bill Fitzpatrick

Beverly-Hanks Realtors

Wondering what is an estate tax? While the name makes it seem like a variation to regular “property tax”, the correct estate tax definition is pretty different.

An estate tax is a federal tax imposed on the estate of a decedent according to the value of that estate upon the death of the taxpayer/homeowner via a will or according to state intestate laws. In other words: a tax the government collects from the transfer of real estate as an inheritance.

Note: estate tax does not apply to surviving spouses; only when the beneficiary is an heir. Plus, the tax is paid by the estate, not the heirs.

The first step in the computation of the federal estate tax owed is to determine the value of the decedent's gross estate. This determination can be made by adding the following values of assets owned by the decedent at the time of death:

1. property owned outright.
2. gratuitous lifetime transfers, but with the stipulation that the decedent retained the income or control over the income.
3. gratuitous lifetime transfers subject to the recipient's surviving the decedent.
4. gratuitous lifetime transfers subject to the decedent's retaining the right to revoke, amend, or alter the gift.
5. annuities purchased by the decedent that is payable for the lifetime of the named survivor as well as the annuitant.
6. property jointly held in such a manner that another party receives the decedent's interest in that property at the decedent's death because of that party's survivorship.
7. life insurance in which the decedent retained incidents of ownership.
8. life insurance that was payable to the decedent's estate.

The second step in the computation of the federal estate tax owed is to subtract allowable deductions (including bequests to charities, bequests to the surviving spouse, funeral expenses, and other administration expenses) from the gross estate. This results in the tax estate. Adjustable taxable gifts are then added to the tax estate, resulting in the computational tax base.

Real Estate Tips:

When buying a home, think about the future. Ask your real estate agent to recommend a tax specialist so you’re not caught off guard regarding any taxable assets.