Federal estate tax: What is it?

The federal estate tax is a tax levied when the taxable value of all of your assets is in excess of the personal estate tax exemption allowance.

What is a personal estate tax exemption allowance?
What assets are subject to estate taxes?

Q. What is a personal estate tax exemption allowance?
A. Federal tax laws allow you to transfer a certain amount of assets tax-free when you die.  The tax-free amount is referred to as your personal estate tax exemption allowance.

If the value of your assets exceeds the personal estate tax exemption allowance, your executor will be required to file a federal estate tax return and pay taxes on that part of your estate that exceeds your allowed personal tax exemption allowance.

The present state of the tax laws concerning estate taxes is confusing.

  • If you die before the year 2010, the amount of your personal estate tax exemption allowance depends upon the year you die.
  • If you die in 2010, there is no requirement to calculate or pay any estate taxes at all.
  • If you die in the year 2011 or later, the personal estate tax exemption allowance drops to $1 million which was the personal estate tax exemption allowed before Congress voted to change our estate tax laws (see table below) in 2001.

As the existing law will almost certainly change, we urge you to consult a competent professional.

Estate taxes are generally federal taxes and are applicable to everyone; they are a debt of your estate.  The estate representative pays the estate taxes before distributing assets to the beneficiaries.  Some states have estate or inheritance taxes as well.

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Q. What assets are subject to the estate tax?
A. All of your assets are subject to the federal estate tax calculation. Assets include real estate, bank accounts, cash, motor vehicles, stocks, bonds and other securities, jewelry, fine arts or furniture, notes receivable, stock options, deferred compensation, IRAs, Keoghs, retirement plans, pensions, 401(k) plans, life insurance proceeds and all interests in businesses and business property including
shares in partnerships, joint ventures, farms, rights to royalties, value of intellectual property, etc.

The gross value of the estate also includes the value of any gifts given away within two years of your death that exceeded the annual gift tax allowance, currently $12,000 per person.
Q. Are assets with a named beneficiary part of your taxable estate?

A. Yes. The probate value of your estate and the estate tax value of your estate are separate calculations. When deciding if your estate is subject to the federal estate tax, all of your property, including retirement accounts and life insurance proceeds with a named beneficiary, are included as part of your estate property.

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