Estate Depletion by Taxes & Costs
When individuals die, the estates they leave can be subject to depletion by taxes and by costs associated with disposition of the estate, especially when there has been no planning to minimize these costs. One group of costs is associated with events preceding or arising from the individual's death, and can include:
- Medical expenses incurred immediately prior to the death
- Funeral and burial expenses
- Debts that become due upon the death of the individual
Fortunately, individuals can prepare for all of these expenses, establishing in advance a means for paying them that will help keep the estate intact.
- Costs are also incurred in the administration of a deceased person's estate. Typically referred to as probate fees, these expenses can include:
- Attorney's fees
- Executor's fees
- Court costs and other probate expenses
In addition, estates in excess of the current exemption ($2 million in 2008) are subject to federal estate taxes. Many states also impose death taxes. Again, it is possible to anticipate these amounts and make provisions to reduce them and to pay them promptly following death. Probably the most burdensome expense is the federal estate tax imposed on larger estates. If an estate totals $2 million or less (in 2008), no federal tax applies. This estate tax exemption gradually increases, reaching $3.5 million in 2009 under tax law revisions enacted in 2001.
Corresponding to the increase in the exemption is the gradual decline of the top estate tax rate — from 49% in 2003 to 45% for years 2007-2009. The same law enacted a complete repeal of the federal estate tax effective for decedents dying on and after January 1, 2010. However, repeal is effective only for the year 2010, after which the estate tax is scheduled to resume January 1, 2011, unless the law is amended in the intervening years. What the amount of the estate tax exemption will be in 2011 when the tax resurfaces is unclear. The law purports to "restore" the exemption available under prior law. This could refer to the $675,000 exemption in effect in 2001 before passage of the law, or possibly the $1 million exemption scheduled under former law to go into effect in 2006.
Another possible scenario is that Congress may make permanent the $3.5 million exemption (the exempt amount in 2009 before repeal in 2010). Also in 2011, the top rate jumps back up to 55%, the rate that was in effect in 2001 before the law was changed. In the meantime, while the estate tax is still in effect for estates exceeding the exempt amount, it is valuable to see how the tax, combined with probate costs, can reduce the amount of the estate that will be available to the decedent's heirs. In the following example, the figures and percentages are estimated and could be more or less than the amounts shown. Assume the death occurred in 2008, there were no taxable gifts during life, and the gross estate is valued at $4,000,000.
|Gross estate:|| ||$4,000,000|
|Less:||Final expenses & debts||− $160,000 (4.0%)|
| ||Probate costs||− $168,000 (4.2%)|
| || Net || 3,672,000|
| || || |
| ||Federal Estate tax||− $1,533,200|
|Total depletion:|| Federal Estate tax credit|| $780,800 (35.0%)|
| || || --------------------|
| || Federal Tax sub total|| - 752,400|
|Balance left for heirs:|| ||$2,919,600|
In this case, only 72.99% of the original estate remains to pass on to the heirs. And, while all of the expenses above are estimated, and may actually be more or less on a $4 million estate, these are realistic amounts.
Individuals can take certain actions to alleviate the financial problems that arise in conjunction with death. Taking action in advance to minimize estate depletion is the purpose of estate planning with a financial advisor. Estate planning includes making decisions about property ownership, transferring assets, establishing trusts, and making other arrangements designed both to fulfill the individual's wishes and to mitigate the effects of taxation.
* Be sure to talk to a qualified tax advisor before implementing any tax strategy. The above is only an example