Part of estate planning is preparing for any taxes that may apply to your estate. These could be estate taxes, gift taxes, or regular income taxes. Understanding how these taxes could apply to your estate is important to your planning. Why? Because you need to know whether the state or federal government could put a lien on your assets after you die.
You need to know whether your family will have to deal with accountants, estate tax returns, and paying your taxes for you. It’s also nice to know how much of your estate will pass to your heirs and how much of it will be liquidated to pay the government.
What are estate taxes?
An estate tax is a tax that applies to you after you die. We also call these “death taxes.” An estate tax is applied to the gross value of you estate. There may be an exemption amount that is deducted from your gross value. Whatever is left over is the amount that is taxed.
Here is how it works. After your death, your executor or personal representative will file a Form 706 with the IRS identifying your assets and the values at the time of death. Those values will be used to calculate the total value of the estate. You will then deduct the exemption amount from the total amount. The resulting amount is the taxable estate. The federal estate tax is about 40%.
What is the Estate Tax in Oklahoma?
Oklahoma repealed Estate Tax in 2010. For individuals who died prior to 2010, the Oklahoma Tax Commission had only ten years to collect on any tax liens that resulted from pre-2010 estate taxes. That deadline passed on January 1, 2020. Therefore, there is no concern for estate taxes in Oklahoma from a state tax perspective.
But there are still federal taxes that apply to certain estates, particularly large ones.
Since 2022, the Federal Estate Tax exemption has been $12,060,000, adjusting every year for inflation. Earlier this year, the One Big Beautiful Bill increased that exemption to $15 million, per spouse. Meaning that estates that are less than this amount do not have to obtain tax ID numbers and pay federal taxes on the estate. For married couples, each spouse may claim the $15,000,000 exemption. Next, spouses may defer estate tax filings until the death of the second spouse under the Unlimited Marital Deduction. These laws effectively make the federal estate tax inapplicable to estates that are less than $30 million.
The vast majority of Oklahomans will not have to worry about federal estate taxes. Those that do have estates valued over the exemption limit will want to partake in advanced planning strategies to reduce the amount of tax they will pay after death. This type of planning can take a long time, particularly if it requires you to set up new trusts and invest your assets according to the advanced plan. Therefore, you will want to start this process as soon as possible.
Should you file an estate tax return even if your estate won’t owe any taxes?
Even if your estate will not owe any estate taxes, there are reasons for filing an estate tax return anyway. One reason is to document the date of death values on your assets. Your heirs can benefit from this later when they go to sell those assets. Your heirs will first inherit your assets at a “stepped up basis,” which is the market value at the date of your death. Therefore, it is strategic to go ahead and log those values during the year after the death. That way, if the IRS audits the heirs many years later, they can point to that initial 706 Form that was filed.
Oklahoma City Estate Planning Attorney
Travis Charles Smith is an estate planning attorney in Oklahoma City. Travis counsels clients on wills, trusts, power of attorney designations, and avoiding court and family conflict with appropriate and thoughtful estate planning. If you are interested in scheduling a consultation, you may contact our office here.