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Taking Care of Mom and Dad: Calculating Estate Tax

A taxable estate is determined by calculating the gross value of a dead person's estate minus various allowable deductions. Once this calculation is made, the IRS uses this number to assess estate taxes

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A gross estate includes the total value of all owned assets or property in which your parents had an interest at the time of one of their deaths. 1 The estate also includes:

  • life insurance proceeds payable to the estate or, if the dead parent owned the policy, to his or her heirs;
  • the value of certain annuities payable to the estate or its heirs; and
  • the value of certain kinds of property transferred out of the estate within three years before the parent died.

The allowable deductions used in calculating the taxable estate include:

  • funeral expenses paid out of the estate;
  • debts the parent owed at the time of his or her death; and
  • the marital deduction (generally, the value of the property that passes from the estate to a surviving spouse).

Once you've calculated the taxable estate value, you can apply the unused portion of your parents' unified credit against taxes due.

For example, Jon gave his daughter Angelina $100,000 in 2002. This was Jon's first taxable gift; he filed a gift tax return, subtracting the $11,000 annual exclusion and figuring the gift tax on his taxable gift of $89,000. The gift tax turned out to be $17,800. Jon didn't want to pay this tax, so he used $17,800 of the unified credit to eliminate the tax on the gift.

1 - There's not enough room in this book to analyze the details of estate planning. For a more complete treatment of the subject, see Silver Lake Publishing's Family Money (2002). Some parts of this chapter are based on material in that book.

Jon made no other taxable gifts and died in 2003. The available unified credit that could be used against his estate tax was $328,000. This was the unified credit for 2003 ($345,800) less the unified credit used against the tax on the gift to Angelina ($17,800).

An estate tax return must be filed if the gross estate, plus any adjusted taxable gifts and specific gift tax exemption, is more than the filing requirement for the year of death.

The adjusted taxable gifts is the total of the taxable gifts your parents made after 1976 that are not included in their gross estate.

Prior to President George W. Bush's estate tax law changes -- which took effect in 2002 -- all transfers of money or property (outright, or by will or trust) were subject to a single, federal unified gift and estate tax system. President Bush's changes have set the estate tax (though not the gift tax) for repeal in 2010. Then, in 2011, the estate tax will revert to the rate that was in effect before 2002.

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