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By Roy Schneider, Esq.

In order to predict how much your estate will have to pay in taxes, you must first determine the value of the estate. To determine this, many assets might have to be appraised at fair market value. The estate includes all assets including real estate, cash, securities, stocks, bonds, business interests, loans receivable, furnishings, jewelry, and other valuables, such as intellectual property, including patents, trademarks and copyrights.

Once your total worth is established, you can subtract liabilities like mortgages, credit cards, other legitimate debts, funeral expenses, medical bills, and the administrative cost to settle your estate including attorney, accounting and appraisal fees, storage and shipping fees, insurances, and court fees. The result will be your estate’s net worth.  The administrative expenses will likely total roughly 5% of the total estate. Any assets that is bequeathed to charity through a trust or will escapes taxation, and the value of those assets must be subtracted from the total. Any assets transferred to a surviving spouse are not subject to taxation as long as your spouse is a US citizen.  There are different and complex rules when a surviving spouse is a non-US citizen.

If the net worth of an estate is less than the federal and state exemptions, no taxes must be paid (California no longer has a state inheritance tax, although other states do). However, the value of assets over the exemptions will be taxed. The amount over the exemptions is referred to as the taxable estate. A testator’s assets are taxed by the state in which the will is probated. Taxes paid by the estate to the state may be deducted for Federal tax purposes. The Federal exemption was $5.45 million in 2016 and is slated to increase in 2017, by the rate of inflation as determined in the Federal Estate Tax legislation. Any amount above the Federal exemption is taxed at the rate of 40%.

If an estate earns money while it is being administered and distributed, for example, if real estate is rented or businesses continue to operate, it will be necessary for the estate to complete an income tax return and pay federal and state taxes on the income it receives. The net income of the estate can be added to the taxable portion of the estate if it is over the federal or state exemption. It is important to be aware that the laws surrounding estate taxes have changed frequently and, given the current crop of Presidential candidates, it may change again.  Thus it is necessary to have a seasoned professional assist in navigating the process, and to notify you if changes in the laws will affect your estate plan.  If your estate is one that may be subject to estate tax, there are a number of safe and well-tested means by which such tax can be minimized and even completely eliminated.

If you have any questions regarding your will, trust or estate plan in general, or because you are concerned about having your heirs pay an estate tax, please call and make an appointment with one of the knowledgeable estate planning attorneys at Schneiders & Associates, L.L.P.

About the Author
Theodore J. Schneider practices in the areas of business and corporate transactions, employment law counseling, municipal and public law, real estate and land use, and homeowner associations. Ted began his legal career in 2002 when he joined the Los Angeles office of Gibson, Dunn & Crutcher, L.L.P. before relocating to Ventura County to join his father in practice.