How To Calculate Your Taxable Estate And Why It Matters To You

How To Calculate Your Taxable Estate And Why It Matters

In a recent article, we discussed the difference between your taxable and probate estates. In this article, we discuss how you calculate your taxable estate and why doing so is crucial to protecting your family.

I know what you may be thinking, "Here's that lawyer again, bugging me about estate taxes and my estate". Well, after you read this article, you will be glad I did.

Why Calculating Your Taxable Estate Matters to You:

Most people stopped worrying about estate taxes in 2009 when the exemption against the federal death tax was $3.5 million. Few clients had taxable estates in excess of $3.5 million and most thought that was that about death taxes. Not so fast! If you follow my articles, you know that system was trashed by Congress. That's not news anymore, no matter how bad that news is.

What the current Congress did is allow the federal death tax to expire for the year 2010 (creating a nightmare for anyone dying in 2010) and to bring the tax back starting January 1st, 2011. And starting in 2011, the exemption does not return to the 2009 level of $3.5 million. It is reduced to the absurdly low level of $1 million. In addition, the tax rate starts at 45% on the first dollar over $1 million and increases to a maximum rate of 60%!

If you still think that a $1 million exemption against the federal death tax is high, just keep reading to learn how your taxable estate is calculated.

Calculating Your Taxable Estate:

When you calculate your taxable estate (the size of your estate subject to death tax)the best place to start is to think of the word, everything. That's a good word because that is pretty much what is in your taxable estate, everything you own or control or benefit from.

Here are the details.

1. Start with your net worth. That's all your assets minus any liabilities.

2. Use the current value of assets, not what you paid for them. You can use current stock prices, a recent statement from your bank and brokerage accounts. For real estate, you can get a working number just by going on the internet these days.

3. Add in your personal possessions.

4. Add in the current values from your IRA's; 401(k)'s; and pension accounts (but only those amounts that continue on after your death. If your pension stops at your death, we can exclude it from the calculation).

5. Break down these numbers by how each item is owned. For example, make these columns:

My Name:

Joint Name:

If you don't which column to put something in, just put in the first one.

6. Add in the life insurance on your life, if you own or control the policy. This is the category that pushes many clients over the exemption amount. Most people forget to include their life insurance when calculating their taxable estate. While life insurance may be income tax free (and sometimes it isn't even income tax free!) it is not estate tax free.

That is how the calculation is done. Starting 1/1/2011 if your total is nearing or exceeds $1 million, you have federal death taxes to plan for. How your estate pays those is a subject of a different article.

So let's review. Start with your net worth, add in everything else, and then add in the death benefits from your life insurance. Still think a $1 million exemption is more than enough? I don't either.

There is some chance that the new Congress may take this issue up next year. However, one thing I have learned as an estate planner is this: don't rely on Congress to solve clients' estate planning issues! There are planning strategies available to protect you and your family and with the federal death tax coming back in 2011, it may be time for you to look at those.

Let me know if you have questions or comments on this article, or if you need help calculating your taxable estate. It is worth the few minutes it takes!

Bernie Greenberg