Taxable Estate: What it Means, How it Works

What Is a Taxable Estate?

A taxable estate is the total value of a deceased person's assets that are subject to taxation. The net assets subject to taxation equal the person’s total assets minus liabilities and minus the prescribed tax-deductible portion of assets left behind by the deceased that cross some minimum threshold, below which no estate tax is levied.

Understanding a Taxable Estate

A person’s taxable estate includes investment holdings such as cash, stocks, and bonds, as well as real estate and property such as cars, buildings, and collectibles. The taxable estate becomes relevant when an heir inherits the person’s assets and must pay estate taxes on those assets. The heir will only owe estate taxes on the taxable estate, so it is important for the heir to know what portion of the estate qualifies as taxable.

Estate tax, and by extension the taxable estate value, typically does not apply if an estate’s named beneficiary is a living spouse because spouses are eligible for an unlimited marital deduction. But when assets are passed on to a child, sibling, or another beneficiary other than a spouse, taxable estate comes into play.

When determining the taxable portion of an estate, note that the following items can be deducted: funeral expenses paid out of the estate, debts owed by the deceased at the time of death, and value of the assets passed on to the deceased's spouse. Deductible debts may include credit card debt, lines of credit, mortgages, and personal loans. Administrative costs for settling an estate also count as deductions. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself.

To determine the total taxable estate, calculate the value of the estate’s total assets, and subtract the deductible expenses.

How to Handle a Descendent’s Taxable Estate

Estate planning can help families and beneficiaries avoid complicated and surprising tax situations following the death of a loved one. In addition to naming heirs and deciding who should receive which assets, estate planning provides an opportunity to simplify financial matters that an heir will have to handle.

An executor can provide significant guidance on specific steps that can reduce the overall taxable estate. Those steps might include establishing trust accounts for beneficiaries or setting up annual donations to qualified non-profits.

Internal Revenue Service (IRS) Publication 559 contains additional detail on how to determine the taxes owed on an estate. The document covers numerous related issues including which portions of an estate a beneficiary can deduct and how to claim deductions and credits.

After death, an executor is responsible for making sure that estate taxes are paid. As of 2021, the estate tax threshold is $11.7 million, below which no estate tax is levied.