Depletion of Estate by Taxes & Costs

What’s Meant by Estate Depletion?

The estates people leave for their heirs at death can be depleted by taxes and other expenses that become due at the time of death. Without proper preparation, these costs can take a significant bite out of what’s left to pass on to the heirs.

What Are Some of the Costs?

Some costs are associated directly with the individual’s death, including end of life medical expenses, funeral expenses, and debts remaining unpaid at the time of death. Other costs are the result of administering the deceased person’s estate. These can include attorney’s fees, executor’s fees, appraiser fees, court costs and probate expenses.

What About Taxes?

Estates that exceed a certain dollar limit specified in the tax code become subject to the federal estate tax. Some states impose their own estate and/or inheritance taxes, as well. For larger estates, the most burdensome tax can be the federal estate tax. Here’s a closer look:

Estates in 2014 that exceed the federal estate tax applicable exclusion of $5.34 million are subject to tax. The top estate tax rate in 2014 is 40%.

Why Is All of This Important?

With proper preparation, people whose estates are subject to the estate tax can diminish its effects. Without such a strategy, a huge portion of an estate can be consumed by taxes and other costs.

Here’s an example of how one person’s $9,000,000 estate could be reduced.

Gross estate $9,000,000

Less: Final expenses & debts – 360,000

Probate costs – 360,000

State estate tax – 540,000

Federal estate tax (2014) – 960,000

Balance left for non-spouse heirs $6,780,000

In this example, about 25% of the original estate (it could be more or less—these are estimates) is lost before distributions to the non-spouse heirs.

What’s the Solution?

Estate owners can take action to ease the financial problems associated with death. Minimizing estate shrinkage is the purpose of an estate review with a qualified adviser. Reaching decisions about property ownership, transferring assets, establishing trusts, and making other arrangements can fulfill the individual’s wishes and—often most important—mitigate the effects of taxation.

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Registered Financial Consultant
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Private Client Division
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