How Do You Value an Estate for Tax Purposes in 2025?
In 2025, we expect a sunset on the federal estate tax exemption limit. So, the federal estate tax limit could drop from $13.99 million in 2025 to $6.99 million in 2026. Hence, all Americans are rushing to finalize their estate planning and to make the transfers in time. However, when there is haste, there are mistakes. Inaccurate gift and estate tax valuations can lead to non-compliance with tax laws which can have serious consequences.
Hence, in this article, we will review how to accurately value an estate for tax purposes in 2025. We will also cover some professional strategies to maximize estate tax exemption effectively. Read on to know more!
Why is it important to accurately value an estate in 2025?
When you value an estate accurately, you unlock potential tax savings and save yourself from the unsavory consequences of non-compliance with tax laws. So, accurate estate valuations are always important. However, we expect the federal estate tax exemption in 2025 to be the highest in the foreseeable future. So, 2025 could be the best and last chance for many Americans to transfer wealth while minimizing the tax liabilities of the beneficiaries.
When the Tax Cuts and Jobs Act (TCJA) was passed in 2017, it more than doubled the federal estate tax exemption limit from $5.49 million in 2017 to $11.18 million in 2018. Since then, the federal estate exemption limit increased to $13.61 million due to inflation adjustments.
These same inflation adjustments increased the federal estate tax exemption limit to $13.99 million in 2025.
However, the provisions of the TCJA will expire by the end of 2025. When this happens, we will go back to the 2017 federal estate tax exemption limit after adjusting for inflation. Hence, you must try to maximize the estate tax exemption before it sunsets in 2025 and potentially gets halved.
This is extremely important since estate tax can go up to 40%.
| Estate value over the federal estate tax exemption limit | Tax rate |
|---|---|
| $0-$10,000 | 18% |
| $10000-$20,000 | 20% |
| $20,000-40,000 | 22% |
| 40,000-$60,000 | 24% |
| $60,000-$80,000 | 26% |
| $80,000-$100,000 | 28% |
| $100,000-$150,000 | 30% |
| $150,000-$250,000 | 32% |
| $250,000-$500,000 | 34% |
| $500,000-$750,000 | 37% |
| $750,000-$1,000,000 | 39% |
| $1,000,000 and above | 40% |
How to accurately value an estate?
To accurately value your estate, you must take the following steps:
List all assets to be transferred
When you plan on transferring your wealth to your dependents, you must keep a healthy balance between liquid assets such as cash and money market investments, and less liquid assets such as corporate bonds, government bonds, stocks, real estate, and private equity. Ideally, your dependents should be able to manage their living expenses, and possibly invest in their education, with the liquid assets. The less liquid assets can help your beneficiaries in wealth creation.
At this point, it is also important to leave some assets aside for your own expenses and possibly some for charity.
Once you have found the right mix of assets to be transferred to each beneficiary, you must list all assets.
Hire industry professionals for individual asset valuation
When there is an active market for an asset, you can easily find its value. The challenge lies in finding the value of private equity assets, art, collectibles, jewelry, and other valuables. Hiring the services of a valuation expert like Eqvista lends credibility to your private equity asset valuations. Similarly, you must ask an appraiser to estimate the current value of the valuables that you plan on transferring to your dependents.
Find the current balances of bank and investment accounts
In this step, all you need to do is generate the latest account statements and note down the current balances of your bank and investment accounts. These accounts include retirement accounts such as 401(k) accounts, Individual Retirement Accounts (IRAs), and brokerage accounts.
Investment accounts typically have a transfer-on-death (TOD) mechanism that lets you transfer the investment itself and not the cash received after converting investments into cash. This feature can be beneficial when the investment may be difficult to re-enter or if there are significant brokerage and other expenses involved.
Calculate the outstanding debts
Over your lifetime, you may have accumulated debt through credit cards, home loans, auto loans, payday loans, student loans, personal loans, and medical debt. You must settle all debts and pay off all tax obligations before your estate gets distributed.
In case of your death, this duty will fall on your executor. This can significantly reduce the value of your estate.
Calculate the net value of the estate
Once you have estimated the value of all your assets and liabilities, all you need to do is subtract the total debts from the total assets to find the value of your estate.
Professional strategies to maximize estate tax exemption effectively
Here are some strategies that will help you minimize tax liability in estate planning:
Utilize the gift exemptions
In addition to the lifetime federal estate tax exemption, you should also make use of the annual gift tax exclusion limit. In 2024, as an individual, you can gift up to $18,000 to a beneficiary without incurring any gift tax. This amount is doubled to $36,000 per beneficiary if you choose to give a gift along with your spouse. The annual gift tax exemption limit is set to increase to $19,000 per spouse, per beneficiary in 2025.
Also, you do not need to pay a gift tax on gifts to your spouse or when you pay the tuition or medical expenses for someone. Even gifts to political organizations do not attract gift tax.
Grantor Retained Annuity Trusts (GRATs)
Grantor Retained Annuity Trusts (GRATs) are a type of irrevocable trust that pays out a fixed annual payment to the grantor, i.e. the person who establishes the GRAT and transfers assets into it. When the grantor transfers assets into a GRAT, they must pay a gift tax depending on how much of their annual gift exemption limit and lifetime federal gift and estate tax exemption limit has been exhausted.
GRATs are created for a specific number of years after which the remainder of assets is passed to beneficiaries tax-free.
Since GRATs will be included in an individual’s estate for tax purposes upon death, the tax-free transfer benefit can only be realized if the grantor survives the term of the GRAT.
One thing to note is that the gift tax will be paid on the value of assets at the time of transfer. Any appreciation of GRAT assets will not be taxed upon transfer.
Hence, GRATs are commonly used to lock in the value of high-growth assets such as stocks.
So, suppose your lifetime federal gift and estate tax exemption limit was not used at all. Then, you set up a GRAT for 10 years where you transfer $13 million worth of stocks. Since this transfer is lower than the lifetime federal gift and estate tax exemption limit, you do not have to pay gift tax for this transfer.
For 10 years, you will receive a fixed annuity. At the end of the 10 years, all assets in the GRAT will be transferred to your beneficiaries without any tax liability, no matter how much the stocks grew in value.
Utilize tax deductions from charitable contributions
When you make a charitable contribution, you can deduct it entirely from your estate for tax purposes. Suppose you have an estate of $18 million which you want to transfer in 2025 when the lifetime federal gift and estate tax exemption limit will be $13.99 million. So, your taxable estate will be $4.01 million on which your beneficiary will need to pay a tax of 40% or $1.6 million. As a result, the total amount transferred to your beneficiary will be $16.4 million.
However, if you make charitable contributions of $4.01 million, you can deduct this amount from your taxable estate which will then drop to zero. This will let you transfer $18 million tax-free.
You must note that if your donations come out of your estate, the amount transferred to your beneficiary post-tax always drops. Let us understand this through the following table.
| Particulars | No charitable contributions | Charitable contributions coming out of the estate | Charitable contributions not coming out of the estate |
|---|---|---|---|
| Estate | $18,000,000.00 | $18,000,000.00 | $18,000,000.00 |
| Charitable contributions | $ - | $4,010,000.00 | $4,010,000.00 |
| Exemption | $13,990,000.00 | $13,990,000.00 | $13,990,000.00 |
| Taxable estate | $4,010,000.00 | $ - | $ - |
| Value of estate after charitable contributions | $18,000,000.00 | $13,990,000.00 | $18,000,000.00 |
| Tax liability (40% on taxable estate) | $1,604,000.00 | $ - | $ - |
| Amount transferred | $16,396,000.00 | $13,990,000.00 | $18,000,000.00 |
Eqvista – Enabling tax savings and compliance with accurate valuations!
With the provisions of TCJA expiring by the end of 2025, next year will be the best and last chance in the foreseeable future to transfer your wealth while minimizing your beneficiary’s tax liability. After this, the lifetime federal estate tax exemption limit is scheduled to drop to 2017 levels after adjusting for inflation.
Utilizing Grantor Retained Annuity Trusts (GRATs), annual gifting exemptions and tax deductions from charitable contributions are some professional strategies to maximize estate tax exemption effectively.
To make the most of this exemption limit without risking non-compliance with tax laws, you should invest in an accurate estate valuation by an expert like Eqvista. Our team has experience in valuing some of the most complex securities for thousands of clients. Contact us to know more.
