Estate planning can be complicated and overwhelming, but understanding the basics of your taxable estate is critical to allocating wealth in a way that aligns with your goals. This article outlines some key aspects of estate taxes including what assets are included, which deductions can be applied, and how lifetime wealth transfers impact how much estate tax is owed.

These considerations are an essential part of maximizing the value of assets transferred to beneficiaries by working toward tax efficiency.

How Are Estate Taxes Calculated?

The amount of federal estate tax owed is calculated using Form 706, also known as the United States Estate (and Generation-Skipping Transfer) Tax Return which encapsulates all relevant elements of someone’s estate in one document. Estates are highly personal and can differ significantly between individuals.

“Everyone’s balance sheet is a little bit different,” says Guy Hockerman, CPA, CFP^®, Financial Planning Manager at Commerce Trust, “and what that means in terms of what needs to be put in place for an estate plan can be different for every family.”

However, some elements like what assets are typically included, which deductions can be made, and how wealth transfers that occurred during the decedent’s life impact the tax due are broadly applicable.

What Assets Are Included in My Estate?

Assets like real estate, investments, cash, life insurance on the deceased, trusts, annuities, valuable personal property, and business interests are all examples of what comprises the gross estate.

Notably, the IRS uses the current fair market value of the decedent’s assets rather than previous valuations or the original purchase price when determining the value of someone’s gross estate.

Which Deductions Can Be Applied?

The IRS offers several deductions that can lower the value of the gross estate, which can effectively lower how much estate tax is paid. Some of the most common deductions include funeral expenses paid by the estate, estate administration expenses, certain outstanding debts, charitable bequests, and property that passes to a surviving spouse.

Any state estate taxes paid or anticipated to be paid are also deductible. Many states do not levy estate taxes at the state level, but it is an important factor for those with legal residency in states that do. For example, someone with a $20 million estate with legal domicile status in Missouri would owe no state estate taxes, but that same person would owe almost $2.3 million in state estate taxes if domiciled in Illinois.¹

How Do Taxable Gifts Impact My Estate Taxes?

Previous taxable gifts can potentially increase an individual’s estate tax liability. Once all applicable deductions have been subtracted from the gross estate, the difference equals the “taxable estate.” Any taxable gifts made over the decedent’s life are then added to the taxable estate.

Taxable gifts are recognized when cash or an asset that is greater in value than the annual exclusion amount is transferred to a non-spouse. In 2024, the annual exclusion amount is $18,000 for single donors and $36,000 for married couples. That means gifts can be made to as many individuals as one likes up to $18,000 tax-free. The annual exclusion amount has been adjusted over time and has only increased since 2011.

Any gift over the annual exclusion amount is known as a taxable gift and requires submitting Form 709, also known as a gift tax return, to the IRS. If that gift maker still has estate and gift exemption remaining, there will be no tax paid but rather Form 709 will capture the use of that exemption.

What Exemptions Can I Use to Lower My Estate Taxes?

Two main exemptions are utilized to calculate an individual’s overall estate tax liability. The first is called the estate and gift tax exemption. The IRS combines a person’s cumulative taxable gifts made over their lifetime and the value of their taxable estate as of the date of death to determine how much of the lifetime gift and estate tax exemption is used to transfer assets tax-free. Any sum over this threshold is subject to a progressive tax that quickly rises to a 40% rate.

The second exemption is called the “generation-skipping transfer” (GST) tax exemption. A tax is levied on any taxable gifts given during the life of the donor to a “skip person,” or someone two or more generations below the donor’s generation. Any gift that meets these criteria above the annually adjusted lifetime GST exemption amount would be taxed.

It is important to note that these two exemptions are separate from one another. Both exemptions, however, are based on cumulative wealth transfers over someone’s entire life.

Navigate Estate Tax Complexity with Commerce Trust

In estate planning conversations, tax implications are only a piece of the overall strategy. While this article provides an overview of the general elements involved in how estate taxes are calculated, your team of wealth management professionals can help you work through the complexities of estate planning.

Commerce Trust uses a holistic and personalized approach to estate planning. “There is a lot of value we can add from our multi-perspective approach, working in coordination with your financial and legal advisors,” Todd Gebhardt, CPA, Director of Tax Services at Commerce Trust.

The Commerce Trust team-based structure provides clients with a seamless experience starting with understanding and articulating their financial goals to putting in place the structure required to execute their estate plan, including securing a reliable executor or trustee and handling trust administration all in one place. Learn more about our private wealth management services or contact the Commerce Trust team today to initiate estate planning discussions and ensure readiness for your future.

[1] “Illinois Estate Tax,” SmartAsset, https://smartasset.com/estate-planning/illinois-estate-tax.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP^® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.

The opinions and other information in the commentary are provided as of April 12, 2024. This summary is intended to provide general information only, and may be of value to the reader and audience.

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. 

Commerce Trust does not provide tax advice to customers unless engaged to do so. Commerce Trust does not provide legal advice to its customers. Consult an attorney for legal advice, including drafting and execution of estate planning documents.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Commerce Trust is a division of Commerce Bank.

Investment Products: Not FDIC Insured | May Lose Value | No Bank Guarantees