With the federal estate tax playing a major role in estate planning, it is important to understand estate taxes and the terms that are used in this area. As you probably know, the IRS seems to have a language all their own, so we will define the most commonly used terms in estate taxes as it pertains to creating an estate plan.
Capital Gain: The profit from the sale of property such as stocks, bonds and real estate.
Cost Basis: The original price of an asset, such as stocks, bonds, property or equipment; the amount of the investment in a property for tax purposes; normally the basis of property acquired from an inheritance is its fair market value at the date of death.
Federal Estate Tax: A tax on your right to transfer property at your death.
Generation-Skipping Transfer Tax: A tax on property that is passed from a grandparent to a grandchild (or great-grandchild) in a will or via trust. The tax is also assessed on property passed to unrelated individuals more than 37.5 years younger than the deceased.
Gross Estate: Everything a deceased owned or had financial interests in at the date of death.
Net Estate: The part of an estate which remains after the allowable deductions for administering the estate have been made.
Special Use Valuation: Property is normally valued at its fair market value for purposes of the estate tax; however, an exception to this applies to certain real property of closely held family farms and other family-owned businesses. If all the requirements are met, the property will be valued in accordance with its actual, current use. This is an important estate planning tool for farming families and small businesses.
Unlimited Marital Deduction: This deduction allows a spouse to pass their entire estate, regardless of size, to the other, with no federal estate taxes.