Put simply, estate taxes are taxes levied on your property when you transfer it to others upon your death. A tax will be applied to your property whether it is transferred by will or intestacy, which are the rules that determine how your estate is split when you do not have a will.
Farmers, ranchers and private landowners that have a lot of land, but not a lot of liquid assets, tend to have distinct issues with estate taxes. This is because the high value of the land can put you above the exclusion amount, but the lack of liquid assets leave no way to pay the taxes. In many cases the beneficiaries of an estate like this will have to sell off part of the land to pay the estate taxes, which hurts the farm or ranch as a business. Moreover, subdivision leads to sprawl and development, which leads to the decline of rural communities.
Not every estate will be taxed. The tax code contains an exclusion amount, or tax credit for up to a certain value of your total estate. If your estate is valued at below the threshold then the tax credits can be applied to your estate taxes and you may not be required to pay any estate taxes. The exclusion amount also applies to gifts you make because gift and estate taxes are unified.
The value of your estate that can be taxed is known as your taxable estate. The taxable estate is your gross estate minus any valid deductions you can take. Your gross estate includes anything that you own or have control over and receive a benefit from. This will include your land, any interest in a corporation, trust assets, and life insurance policies. There are many deductions you can take, such as for executor’s fees, funeral expenses, debts, contributions to charities (including post mortem conservation easement contributions), and the marital deduction.
Additionally, property in your estate will receive a stepped up basis under estate tax laws. This means that when calculating the value of the property, you will not pay taxes on the difference between the original price and the sale price, but the difference between the price at the testator’s death and the sale price, which is usually a lot less, or nothing!
The value of your estate will be determined at the date of your death. One exception is if your executor elects to have the estate valued 6 months after your death. This will ensure that any dramatic drops in the value of your property are mitigated if they would occur quickly after you pass.
For more information on what property is taxed and how the federal estate tax is calculated, click here.