When you read about the estate tax, and about estate tax planning, you will see references to one’s “taxable estate.” Understanding your taxable estate is key to your estate planning process. What exactly is your taxable estate, what assets are included in (or excluded from) your taxable estate, and why does it matter?
What is a “Taxable Estate?”
Your taxable estate consists of all of the assets you own or have control over at the time of your death. The value of those assets are subject to federal estate tax. That doesn’t mean that your estate will pay tax on the value of all property in your taxable estate after your death. In fact, it almost certainly will not. Here’s why.
Everyone gets a certain amount of exemption from federal estate tax. This estate tax exemption is also sometimes called the “lifetime exemption” or “unified exemption.” The amount of the exemption changes from year to year due to changes in the law and adjustments for inflation. The exemption amount for 2025 is $13.99 million for an individual.
If the value of your taxable estate is less than the amount of your exemption, your estate pays no federal estate tax if you die. Even if the value of your assets exceeds the amount of the exemption, your estate may not trigger federal estate tax if part of it passes to a spouse who is a U.S. citizen. While those assets are still technically part of your taxable estate, there is an unlimited deduction for assets left to a surviving spouse. That deduction would allow your surviving spouse to defer estate tax on those assets until their death.
You should always know what your taxable estate consists of, and how to reduce it if necessary. And be aware that the tax laws change regularly.
What Is—and Isn’t—Part of Your Taxable Estate
Your taxable estate includes the following:
- Real property that you own or control, such as your primary residence; vacant land; investment, vacation, or rental properties; and other real estate.
- Bank accounts like savings accounts, checking accounts, and certificates of deposit (CDs)
- Investments such as stocks, bonds, and mutual funds
- Retirement accounts including the value of 401(k)s, IRAs and Roth IRAs, and pensions
- Personal property such as your clothing, jewelry, furniture, artwork, collectibles, cars, boats, and other vehicles
- The proceeds of life insurance policies that are owned by you, not by another person or entity
- The value of your interest in a business entity such as a corporation, partnership, or LLC
- Assets in a revocable trust over which you have control or access
- Annuity payments to which you are entitled
- Accounts receivable and other debts owed to you personally
- Certain jointly held property, to the extent you contributed to the purchase price
While certain types of trusts are used for tax planning, and remove assets from your taxable estate, a revocable living trust does not. That is because its revocable nature means that you retain control over the assets in the trust just as if they were in your own name.
However, the following types of assets are excluded from your taxable estate:
- Any assets in a properly structured irrevocable trust, over which you no longer exercise control
- Life insurance policies not owned by you, such as those taken out by another person or held in an irrevocable life insurance trust (ILIT)
- Gifts that you made during your lifetime, including charitable gifts, so long as the gifted assets are no longer under your control
- Assets that you left directly to a qualified charity
- Certain jointly held property to the extent acquired by a joint owner.
Estate tax planning involves removing assets from your taxable estate, or deferring tax that may become due on them. But even if you are not worried about estate tax liability, you may still want to consider estate tax planning.
Why is Estate Tax Planning Important?
Estate tax planning helps minimize the tax burden on your heirs (after all, it is they, not you, who will end up paying any taxes due out of your estate). But even though only a small percentage of American estates end up paying estate taxes, there are other reasons for tax planning.
Although the federal estate tax exemption is at a historic high, it is set to “sunset” to 2017 levels (adjusted for inflation) at the end of 2025. That means that some estates that wouldn’t be vulnerable to taxation this year will be in 2026.
Federal estate tax is not the only potential tax liability to avoid. Strategic planning on your part may help your heirs avoid income tax on your estate or capital gains tax that could take a bite out of your heirs’ inheritance.
Tax planning can also make sure that there are enough liquid assets in the estate to pay taxes of any type that are due. Without sufficient liquidity, your heirs may have to sell off assets in order to meet their tax obligations. Tax planning is especially important for estates whose principal asset is a family farm or business.
There are many opportunities for reducing your taxable estate. These include strategic gifting during your lifetime, charitable giving, and the establishment of certain types of irrevocable trusts, to name only a few. Your estate planning attorney can advise you as to which strategies are best for your needs.
Work with Experienced Estate and Tax Planning Attorneys
To learn more about what is and isn’t included in your taxable estate, or to get help with tax planning for your estate contact our law firm. The knowledgeable estate planning attorneys at Barron, Rosenberg, Mayoras & Mayoras work with clients who want to plan ahead to minimize their heirs’ tax burden. Schedule a consultation today by calling (248) 213-9514 in Michigan or (941) 222-2199 in Florida to learn how we can assist you. You can also use our simple online contact form.