Financial Intel Monthly

Estate Taxes

Jul 30, 2020 1:15:00 PM / by The Retirement Group (800) 900-5867

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What Are Estate Taxes?

There are many factors that you should consider when designing an estate plan. One of the most significant is taxes. The act of giving away your property may be subject to taxes on the federal level, state level, or both. These tax liabilities may be the largest potential expenses your estate may have to pay. This means the property that you want to go to your loved ones may go to the federal government and your state instead. Understanding what these taxes are, how they work, how they may affect your estate, and how they can be minimized is vital to implementing a successful estate plan. While estate taxes technically refers to taxes that are imposed at death, there are two types of taxes that may affect how you plan your estate: (1) transfer taxes and (2) certain income taxes.

Transfer taxes are imposed when you give your property to someone else. This can be done during life (this kind of transfer is called a gift) or at death (this kind of transfer is called a bequest or legacy if you leave a valid will, and intestate succession if you don't). There are six transfer taxes that may affect your estate: (1) state gift tax, (2) state death taxes, (3) state generation-skipping transfer (GST) tax, (4) federal gift tax, (5) federal estate tax, and (6) federal GST tax. You may also need to know how income taxes affect your estate or your choice of estate planning strategies. There are also three income tax considerations of which you should be aware: (1) income taxation of trusts, (2) your final personal income tax return, and (3) income taxation of your estate.

What Are Transfer Taxes?

A transfer tax is imposed when you give your property to someone else. There are six types of transfer taxes to which you or your estate may be subject.

State Gift Tax

Currently, only a few states impose a gift tax. A gift is a transfer of property you (the donor) make during your lifetime. The person or organization you give to is called the donee. When you make a gift, it is in exchange for nothing, or for property of lesser value.

In other words, it is not a bona fide sale. Generally, gifts must be reported and gift taxes paid in the year following the year in which the gift is made (e.g., gift taxes on a gift made in 2019 would be due in 2020). If your state imposes a gift tax and you intend to make lifetime gifts, contact an attorney or your state's department of revenue or taxation to find out what gifts need to be reported, how to compute the gift tax, and when and how to file a gift tax return.

State Death Taxes

A state death tax is imposed on property distributed after your death. You should be especially aware of your state's death tax because it may, in some instances, affect even the smallest estates. There are three types of state death tax.

State Generation-Skipping Transfer (GST) Tax

Some states impose a GST tax. The GST tax is imposed on property transferred to a family member who is two or more generations below you (e.g., a grandchild or great-nephew). Contact an attorney or your state's department of revenue or taxation to find out what transfers may be subject to state GST tax, and when and how to file a return.

Federal Gift and Estate Tax

Generally speaking, federal gift and estate tax is imposed on property transferred to others either while you are living or at the time of your death. Unlike the individual states, the federal tax system is unified. In other words, the IRS adds lifetime and at death transfers and taxes them according to one rate schedule. Here is how the unified tax system works:

Before 1976, the federal tax system worked much like the states. Gifts made during life (taxable gifts) were reported and any gift tax owed was paid on an annual basis. After death, an estate tax was imposed only on property transferred at death (gross estate).

Since 1976, generally, taxable gifts are still reported and any gift tax owed is paid annually. (Generally, you must file a gift tax return and pay the gift tax due, if any, by April 15 of the year following the year in which you make a taxable gift.) But, upon death, all taxable gifts are added to your gross estate for estate tax calculation purposes, even though a gift tax return may already be filed and gift tax paid (gift tax paid is deducted from estate tax owed, if any).

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Congress unified the gift tax and estate tax systems so that (1) you can't avoid estate tax by giving your wealth away before you die and (2) you pay taxes on the cumulative amount of wealth you give away (this pushes your estate into a higher tax bracket).

You need a basic understanding of the unified tax system so that you can (1) estimate your estate tax liability and (2) minimize your estate taxes using an estate freeze technique. An estate freeze technique is any planning device that allows you to freeze the present value of your estate and shift any future growth to your successors. Understanding how your estate tax liability is calculated and the variety of techniques you can employ to freeze your estate may help you:

  • Save your property for your beneficiaries: Estate tax rates could reach as high as 40 percent for the estates of persons dying in 2020. This means that a large chunk of your estate may go to the IRS instead of your loved ones. If you want to preserve your estate for your beneficiaries, you need to know how to keep your property from being subject to estate taxes.
  • Reduce estate tax liability: Under the unified tax system, you are allowed a basic (applicable) exclusion amount that reduces your gift tax/estate tax liability. Additionally, there are exclusions, deductions, and other credits available that allow you to pass a certain amount of your estate free from tax. You need to understand what these exclusions, deductions, and credits are and how they work in order to take full advantage of them. Another method of reducing your estate tax liability is to prevent any further growth in the value of any appreciating assets that you own from being taxed to your estate. Estate freeze techniques range from relatively simple (e.g., installment sale or private annuity) to the more complex (e.g., gift- or sale-leaseback). You need to know what these techniques are and how they are used in order to know which, if any, is best for you.
  • Provide for payment of estate taxes: Generally, estate taxes must be paid within nine months after your death. In order to avoid depriving your beneficiaries of what you intend for them to receive, you should provide that specific and sufficient assets be set aside and used for this purpose. In addition, these assets should be sufficiently liquid to pay this expense when it is due.

Caution: Plan for estate tax expense: Although calculating estate taxes can be complex, you should estimate what the amount of your estate taxes may be so that you can arrange to replace the wealth that is lost if you have specific gifts you would like to make.

Federal Generation-Skipping Transfer (GST) Tax

Like the state-imposed GST tax, the federal GST tax is imposed on property you transfer to an individual who is two or more generations below you (e.g., a grandchild or great-nephew). The tax code is drafted to levy a tax on property as it is passed from generation to generation at each and every level. The purpose of the GST tax is to keep families from avoiding estate taxes by skipping an intermediate generation. A flat tax rate equal to the highest estate tax rate then in effect is imposed on every generation-skipping transfer you make over a certain amount.

What Are Certain Federal Income Taxes That You Should Know About?

There are three federal income tax considerations of which you should be aware:

Income Taxation of Trusts

If your plan includes the use of a trust, you need to know that a trust may be a taxpaying entity. The trustee may be required to file an annual return and pay income tax on the trust income.

Decedent's Final Income Tax Return

You may earn income during the year in which you die. If so, you’re personal representative will need to file your final income tax return (both federal and state) and pay any income tax that may be owed. The funds to pay the income tax will be paid from your estate. Your tax year ends on the date of your death.

Income taxation of your estate

Your estate is considered a separate tax-paying entity by the IRS. Your personal representative must file and pay income tax on any income your estate receives (e.g., interest from bonds or dividends from stock).



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


The Retirement Group is not affiliated with nor endorsed by,,,,, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.


The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at


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