For larger estates, federal estate-tax rules can become an important consideration. State-level estate or inheritance taxes may also apply depending on where the individual lives, where property is located, and other circumstances.

Estate planning is broader than estate tax planning. It can also involve wills, trusts, beneficiary designations, powers of attorney, charitable planning, business succession, and arrangements for transferring assets to family members or other beneficiaries.

What Is an Estate Tax?

An estate tax is generally a tax imposed on the transfer of certain property and financial interests after an individual's death.

The federal estate-tax system generally considers the value of assets owned or otherwise included in the taxable estate, along with applicable deductions and exclusions.

Potential estate assets can include:

• Real estate

• Bank accounts

• Investment accounts

• Business interests

• Retirement-related assets

• Life insurance interests

• Personal property

• Trust interests

• Certain transferred assets

The applicable tax treatment depends on the asset, ownership structure, transfer history, deductions, exemptions, and federal and state rules.

Federal Estate Tax vs. State Estate Taxes

Federal estate taxes and state-level estate taxes are separate considerations.

The federal government has its own estate-tax rules, while some states impose estate taxes or inheritance taxes under their own laws.

Important state considerations can include:

• State of residence

• Property location

• Estate-tax exemption

• Inheritance-tax rules

• Filing requirements

• State-specific deductions

• Trust structures

• Business ownership

• Beneficiary relationships

A person may therefore need to consider both federal and state rules when developing an estate plan.

Estate Tax Exemption

Federal estate-tax rules include an exclusion amount that determines how much property can generally pass before federal estate tax becomes applicable, subject to the specific rules in effect for the relevant tax year.

The exemption amount can change over time because of legislation and inflation adjustments.

Estate planning should therefore use current figures rather than relying on older exemption amounts found in outdated documents or online articles.

Other concepts that may be relevant include:

• Applicable exclusion amount

• Unified credit

• Gift-tax exemption

• Annual gift-tax exclusion

• Portability

• Estate-tax deductions

• Marital deductions

• Charitable deductions

Current IRS guidance should be reviewed when evaluating federal estate-tax exposure.

Estate Valuation

Estate tax calculations depend heavily on how assets are valued.

Potentially relevant assets may include:

• Residential property

• Commercial real estate

• Closely held businesses

• Investment portfolios

• Partnership interests

• Private-company shares

• Collectibles

• Intellectual property

• Other valuable property

Some assets can be relatively straightforward to value, while privately held businesses and specialized property may require professional valuation.

Important valuation factors can include:

• Fair market value

• Ownership percentage

• Marketability

• Control rights

• Comparable transactions

• Income-producing capacity

• Underlying assets

• Valuation date

A qualified appraiser or valuation professional may be appropriate when significant assets require independent valuation.

Lifetime Gifting and Estate Planning

Lifetime gifts can be part of broader estate planning.

Depending on the circumstances, gifting may involve:

• Cash

• Securities

• Real estate

• Business interests

• Trust interests

• Other property

Gift-tax rules and estate-tax rules are connected, so lifetime transfers should be considered together with the individual's broader estate plan.

A gift can also have income-tax and basis implications for the recipient and may affect future estate-tax calculations.

Before making substantial gifts, individuals should understand the applicable federal and state rules and consider the effect on both the person making the gift and the recipient.

Annual Gift Exclusion

Federal tax law provides an annual gift-tax exclusion subject to applicable limits and requirements.

The exclusion can allow qualifying gifts to be made without using the individual's lifetime gift and estate-tax exemption, depending on the circumstances.

However, not every transfer automatically qualifies.

The treatment can depend on factors such as:

• Recipient

• Amount

• Type of property

• Timing

• Ownership structure

• Documentation

• Applicable tax rules

Current IRS guidance should be consulted for the relevant tax year.

Trusts and Estate Tax Planning

Trusts are commonly used in estate planning for purposes that can include asset management, beneficiary arrangements, privacy considerations, charitable planning, and tax planning.

Different trust structures can have substantially different tax and legal consequences.

Examples include:

• Revocable living trusts

• Irrevocable trusts

• Marital trusts

• Charitable trusts

• Generation-skipping trusts

• Special-purpose trusts

A revocable trust does not automatically eliminate estate-tax exposure simply because assets are placed into the trust.

The tax treatment depends on the trust's structure, ownership rights, retained interests, beneficiaries, and applicable law.

Marital and Charitable Planning

Certain estate-tax deductions can affect the taxable estate.

The marital deduction can allow qualifying transfers to a surviving spouse to receive special federal estate-tax treatment, subject to applicable requirements.

Charitable transfers can also receive specific tax treatment when they meet applicable requirements.

Estate plans involving spouses or charitable organizations may therefore consider:

• Asset ownership

• Beneficiary designations

• Trust structures

• Charitable organizations

• Timing of transfers

• Applicable deductions

• State tax rules

Life Insurance and Estate Planning

Life insurance can create important estate-planning considerations.

The value of a policy and the ownership structure can affect how insurance proceeds are treated for estate-tax purposes.

Potential planning questions include:

• Who owns the policy?

• Who is the beneficiary?

• Does the insured retain ownership rights?

• Is the policy held through a trust?

• What state rules apply?

• How are premiums funded?

Because life insurance arrangements can have significant tax and legal consequences, they should be reviewed with qualified professionals.

Business Succession and Estate Taxes

Business owners may face additional estate-planning considerations.

A closely held business can represent a significant portion of an estate and may be difficult to divide among multiple beneficiaries.

Planning may involve:

• Ownership-transfer arrangements

• Buy-sell agreements

• Business valuation

• Successor identification

• Voting rights

• Management transition

• Liquidity planning

• Trust structures

• Family ownership arrangements

Business succession planning and estate-tax planning can therefore overlap.

Portability Between Spouses

Federal estate-tax rules include a portability concept that may allow a surviving spouse to use certain unused federal estate-tax exclusion amounts from a deceased spouse, subject to applicable requirements and elections.

Portability can be particularly relevant when spouses have significantly different asset levels.

However, portability does not necessarily address every estate-planning issue. Trust planning, state taxes, asset appreciation, generation-skipping transfer considerations, and other factors can remain relevant.

Estate Liquidity

Estate liquidity refers to having sufficient readily available assets or financial resources to address obligations associated with an estate.

Potential obligations may include:

• Taxes

• Debts

• Administrative expenses

• Professional fees

• Property expenses

• Business obligations

Liquidity can become particularly important when an estate contains substantial illiquid assets such as businesses, real estate, or private investments.

Planning may consider whether sufficient liquid resources are available without requiring an unfavorable or rushed asset transaction.

Beneficiary Designations

Some assets transfer through beneficiary designations rather than through a will.

These can include certain:

• Retirement accounts

• Life insurance policies

• Financial accounts

• Transfer-on-death arrangements

Beneficiary designations should be reviewed periodically because they may operate independently of certain provisions in a will or trust.

Important review points include:

• Primary beneficiaries

• Contingent beneficiaries

• Beneficiary percentages

• Spousal considerations

• Minor beneficiaries

• Trust beneficiaries

• Changes following major life events

Estate Tax and Retirement Accounts

Retirement accounts can create tax and estate-planning considerations.

The treatment of inherited retirement assets depends on factors such as:

• Account type

• Beneficiary relationship

• Age of account owner

• Distribution requirements

• Applicable tax rules

• Timing of distributions

Federal retirement-account rules can change, so current IRS guidance should be reviewed when incorporating retirement assets into an estate plan.

Estate Planning for Real Estate

Real estate can require additional planning because property may be valuable but relatively illiquid.

Considerations can include:

• Property ownership

• Joint ownership

• Trust ownership

• Mortgage obligations

• Property taxes

• Valuation

• Location

• Rental income

• Beneficiary arrangements

• State-specific rules

Real estate located in another state can create additional legal and tax considerations.

Estate Tax Planning Checklist

Before reviewing an estate plan, individuals can consider:

• Inventory major assets

• Estimate current asset values

• Review ownership structures

• Identify existing trusts

• Review wills and estate documents

• Review beneficiary designations

• Identify business interests

• Review life insurance ownership

• Consider lifetime gifts

• Review federal estate-tax rules

• Review state estate or inheritance taxes

• Consider estate liquidity

• Review charitable intentions

• Evaluate family succession considerations

• Revisit the plan after major life or financial changes

Recent Estate Tax Planning Developments

Estate-tax planning requires particular attention to changes in federal tax law because exemption amounts, gift-tax rules, reporting requirements, and other provisions can change.

Recent federal tax legislation and annual inflation adjustments can affect the amounts relevant to estate and gift-tax planning.

The IRS publishes current information concerning estate and gift taxes, applicable exclusion amounts, filing requirements, and related federal tax rules.

Because estate-tax planning can involve substantial assets and long-term decisions, current-year rules should be verified rather than relying on historical exemption figures.

Tools and Resources

Useful estate-planning resources include:

• IRS estate and gift-tax guidance

• Federal estate-tax forms and instructions

• State department of revenue or taxation resources

• Estate inventories

• Property valuation reports

• Business valuation reports

• Trust documents

• Beneficiary-designation records

• Life insurance policy documents

• Retirement-account statements

• Qualified estate-planning attorneys

• Tax professionals

• Financial and valuation professionals

Frequently Asked Questions

1. What is estate tax planning?

Estate tax planning involves organizing assets, ownership arrangements, transfers, beneficiary designations, trusts, and other estate-planning elements while considering applicable federal and state tax rules.

2. Is every estate subject to federal estate tax?

No. Federal estate-tax rules include an applicable exclusion amount, and the amount and tax treatment depend on the relevant tax year and individual circumstances.

3. Are estate taxes and inheritance taxes the same?

No. An estate tax is generally associated with the transfer of property from an estate, while an inheritance tax is generally imposed on the person receiving inherited property. State rules vary.

4. Can a trust eliminate estate taxes?

Not automatically. The tax consequences depend on the specific trust structure, ownership rights, retained interests, beneficiaries, transfers, and applicable federal and state law.

5. Should estate plans be reviewed regularly?

Estate plans should generally be reviewed when significant financial, family, legal, or tax circumstances change. Changes in federal or state law can also justify a review.

Conclusion

Estate tax planning brings together tax rules, asset valuation, ownership structures, lifetime transfers, trusts, beneficiary arrangements, family planning, and estate liquidity.

The relevant considerations can differ substantially depending on the size and composition of an estate, family circumstances, business ownership, property location, and applicable federal and state rules.

Because estate and gift-tax regulations can change, significant planning decisions should be based on current government guidance and advice from appropriately qualified legal and tax professionals.