Residents of Oklahoma may have heard that it's unlikely most people will owe federal estate taxes. While it's true that estates valued up to $5,340,000 are exempt from federal estate taxes as of 2014, it's also true that estate value can add up surprisingly fast. A family farm, for example, could easily exceed the threshold in value when you factor in equipment and land.
When planning for estate administration, it's important to understand how valuation and taxation may play a role in inheritance. At the time of death, there is generally an accounting of everything owned -- including real estate, personal property, investment accounts and other assets. According to the Internal Revenue Service, the value used in this accounting is the current fair market value of all items, which may be less or more than you originally paid.
The total value of all items is referred to as the Gross Estate, which is not the same thing as your Taxable Estate. As with income tax returns, there are deductions you can take when preparing estate tax forms. Debts, mortgages and property that passes to individuals such as a spouse and estate administrate expenses are all possible deductions. Once a net estate value is calculated, the value of lifetime gifts is added back to the total -- for this reason, you can't avoid estate taxes by gifting relatives and others with large amounts of money throughout life or just prior to death.
The ending value after all calculations decides whether an estate falls under federal taxation. Since federal estate taxes can be quite hefty, many individuals attempt to maximize deductions or reduce taxable values through tools such as trusts. Moving estate value into various accounts or trusts can be complex, however, and a full understanding of all laws and requirements is essential to avoid mistakes.
Source: IRS, "Estate Tax page" Aug. 15, 2014