Each person residing in the United States at the time of his or her death is provided a credit against the federal gift or estate tax. This credit is the equivalent of a deduction against the assets comprising the gift or the estate and is now known as the “applicable exclusion amount”. Most individuals refer to the applicable exclusion amount rather than the credit because it is much easier to discuss this concept in terms of a deduction. The estate tax applicable exclusion amount effectively changed on January 1, 2015.
In determining the assets which are subject to the federal estate tax at your death, you must remember to include not only assets subject to probate, but also the date of death balance or value of joint accounts, the death benefit payable on life insurance policies you own or with respect to which you possess “incidents of ownership” (the power to change beneficiaries, borrow against the policy, determine settlement options), the value of the balance of retirement accounts, and the value of assets contained in a revocable living trust which you control at your death.
The amount of the gross estate is then reduced by the value of any bequests which you make to qualified charities and the value of the assets which pass to your surviving spouse, if he or she is a citizen of the United States. More about the marital deduction later.
The adjusted gross estate (the gross estate reduced by the charitable and marital deductions) is further reduced by any debts that you have at your death and the amount of expenses incurred to administer your estate. The resulting amount is called your taxable estate. The amount of any adjusted taxable gifts (taxable gifts reduced by the annual exclusion of $14,000 per donee) is then added to the taxable estate in order to calculate the tentative tax payable to the Internal Revenue Service. The tentative tax is then reduced by the amount of the unified credit and by the amount of gift taxes paid more than three years prior to your date of death. The remaining balance is the actual tax liability payable to the Internal Revenue Service, although a portion of that amount will end up being paid to the Nevada Department of Revenue based on the calculation of the state death tax credit.
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