There are hundreds of provisions in the Internal Revenue Code that work together to identify a “taxable estate,” but you can reach a fairly safe conclusion if you take these steps.
First, make a list of all your assets and their current values. This list should include your real estate, your cars, your business interests, your checking account, your savings account, your stock portfolio, your life insurance, your retirement accounts, your annuities and your college savings accounts. Add any other items that you might be able to use before your death, such as club memberships, money other people owe you and potential inheritances. At this point in the process, the IRS wants to know about every asset you have an interest in, including your life insurance and retirement plans. This is often a surprise because people think insurance and retirement assets are tax-free. Some simple planning can help reduce taxes on life insurance. Retirement assets are more complicated, but there are ways to reduce the taxes associated with them. If your estate is taxable and it contains these assets, consult an attorney in person to learn about planning options.
Second, make a list of your debts. This list should include your mortgages, your car loans, your student loans, and any other money that you owe someone else.
Third, compare the total of your debts with the total value of your assets. As you may know, the Federal estate tax changed with the passage of a new law in December, 2010 and the situation is temporarily resolved through December 31, 2012. Absent further congressional action, the estate tax credit will drop back down to $1,000,000 per person on January 1, 2013.
If you are single and the value of your assets exceeds the value of your debts by more than $5,000,000, you may have a taxable estate.
If you are married, include the assets and debts of your spouse in all three steps. Your spouse’s assets may not actually be taxable at your death, but the IRS looks at couples as a single unit at this point in the estate tax process. So don’t set yourself up for problems with the IRS. Be overly cautious at this point in the process and include every asset you can think of. If the value of your combined assets exceeds the value of your combined debts by more than $10,000,000, you may have a taxable estate.
If you have a domestic partner, you do not need to include your partner’s assets in the three steps outlined above so long as each of you is preparing a separate estate plan. If the value of your assets exceeds the value of your debts by more than $10,000,000, you may have a taxable estate.