# Federal estate tax calculation

The taxable value of your estate will determine the amount of money your heirs will have to pay to the government.

Q. What is the taxable value of your estate?
A. Your estate representative must make a list of property you own and, perhaps with the help of an appraiser, assign a fair market value to the property.  The fair market value is the amount the property is worth at the time you die (or six months later if the value is lower than at date of death), not the price you paid for it. Then, he or she must make a list of all the debts you owed at your death.

If you own property jointly with someone else, multiply your ownership share times the fair market value to calculate the estate tax value of the property.  The taxable value of your estate is calculated by deducting the total amount of your debts from the total fair market value of all your assets.

If the taxable value of your property exceeds the personal estate tax exemption allowance, your executor must file a Form 706 Federal Estate tax return and pay the appropriate tax due within nine months of your death.

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Q. What is the personal estate tax exemption allowance?
A. The personal estate tax exemption allowance is the amount of money you can leave free of estate tax.

Q. How do you determine the amount of your personal federal estate tax exemption?
A. It depends on what year you die. The personal estate tax exemption amounts by year of death are shown on the following chart:

 Year Personal Tax Exemption Tax-Free Amount 2006 \$2,000,000 2007 \$2,000,000 2008 \$2,000,000 2009 \$3,500,000 2010 No Tax 2011 and years thereafter \$1,000,000 (reverts to old tax regulations)

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#### Federal estate taxes

Q. How do you determine your federal estate tax rates?
A. The estate tax is a progressive tax levied on the value of the taxable estate exceeding the allowable personal tax exemption allowance, as follows:

 TAXABLE ESTATE ESTATE TAX RATE TEMPORARY RATE Up to \$10,000 18% of excess over \$10,000 \$10,000 to \$20,000 \$1,800 plus 20% over \$10,000 \$20,000 to \$40,000 \$3,800 plus 22% over \$20,000 \$40,000 to \$60,000 \$8,200 plus 24% over \$40,000 #60,000 to \$80,000 \$13,000 plus 26% over \$26,000 \$80,000 to \$100,000 \$18,200 plus 28% over \$80,000 \$100,000 to \$150,000 \$23,800 plus 30% over \$100,000 \$150,000 to \$250,000 \$38,800 plus 32% over \$150,000 \$250,000 to \$500,000 \$70,800 plus 34% over \$250,000 \$500,000 to \$750,000 \$155,800 plus 37% over \$500,000 \$750,000 to \$1,000,000 \$248,300 plus 39% ovr \$750,000 \$1,000,000 to \$1,250,000 \$345,800 plus 41% over \$1,000,000 \$1,250,000 to \$1,500,000 \$448,300 plus 43% over \$1,250,000 \$1,500,000 to \$2,000,000 \$780,000 plus 49% over \$2,000,000 45% \$2,500,000 to \$3,000,000 \$1,025,800 plus 53% over \$2,500,000 45% \$3,000,000 \$1,290,800 plus 55% over \$3,000,000 45%

*Even though the table above lists the published tax rates, Congress changed the highest estate tax rates for U.S. citizens in 2001 to 45%.  For example, assume the value of the estate subject to estate taxes is \$2 million for someone who died in 2008.  The amount of taxes due is \$780,800 plus 45% of the value over \$2 million, rather than the 49% shown in some published estate tax rate tables.

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#### Federal estate tax calculations

Q. How do you calculate the amount of federal estate tax due?
A. The estate tax due is determined by applying the applicable tax rate the year of death to the value of the estate in excess of the personal estate tax exemption allowance applicable the year of death. The death tax rate is currently higher than individual income tax rates. The tax rate changes by year. The amount of the personal federal tax exemption allowance also changes by year.

Step 1. Calculate the taxable value of your estate. Let’s assume the taxable value of the estate was \$2,225,000.

Step 2. Deduct the Personal Estate Tax Exemption Allowance. Let’s assume the decedent died in 2008 when the personal tax exemption allowance amount was \$2 million, leaving a net taxable estate of \$225,000.

Step 3. Determine the appropriate tax rate and calculate the estate tax due.  Since the value of the taxable estate is between \$250,000 and \$250,000, the federal tax due is \$38,000 plus 32% of any amount over \$150,000.  The total federal tax due is \$68,200.
A probate case cannot be closed until evidence is presented to the court that any estate taxes owed by your estate have been paid.  Some banks will not release accounts to the beneficiary until estate taxes are paid.

# 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.

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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# State inheritance taxes: What do you need to know?

Prior to 2001 legislation, states received a portion of the federal estate taxes paid.  This provision was phased out by 2005 and, as a result, many states have or are considering imposing estate taxes on the estate of the deceased.

In addition, some states impose a state inheritance tax on beneficiaries who inherit property.  If any of your beneficiaries live in one of these states, they must report the amount of their inheritance as income when they file their state tax return.  (Don’t plan on dying in a state with an inheritance tax.  It will increase your tax bill.)

You have the right to provide in your will or your trust that any inheritance taxes will be paid from the estate before the estate is distributed to your beneficiaries.

• States may have special rules when spouses and children inherit property; the inheritance tax rate is often lower than the tax rate applied to other beneficiaries.  Many states do not collect inheritance taxes from spouses or children.
• If you own real estate in another state, your estate may need to file and pay an estate or inheritance tax in that state.
• In some states the executor may be required to obtain an inheritance tax waiver from the state tax authorities before the assets in the deceased’s probate accounts may be released.

States are continuing to change their estate and inheritance tax rules.  We recommend that you talk with a professional advisor to understand the status of estate and inheritance taxes in your state if you believe the value of your estate will be subject to a state estate or inheritance tax.

Fact: The following states have some type of an estate or inheritance tax:

• Estate Taxes: Connecticut, Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, Vermont, Virginia, Washington, Wisconsin and the District of Columbia.
• Inheritance Taxes: Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee

# Marital A/B trust: Avoid the married couple estate tax trap

If you do not plan carefully, you may fall into the married couple estate tax trap.  A marital a/b trust could be the solution.

#### The married couple estate tax trap

Q. If you are married, are estate taxes due when the first spouse dies?
A. The first spouse to die may give all of his/her assets to the surviving spouse without paying any estate tax, even if the value of their property exceeds the estate tax exemption, so long as the surviving spouse is a U.S. citizen.  This is referred to as the unlimited marital deduction.

An estate tax calculation will be done when the surviving spouse dies, and will be based upon the fair market value of all the assets owned by the surviving spouse, including those inherited from the first spouse.

Q. What happens to the \$2 million estate tax personal exemption of the first spouse to die?
A. If the first spouse to die leaves everything directly to the surviving spouse, the first spouse to die loses his or her right to claim the existing \$2 million personal tax exemption allowance.  We refer to this as the married couple estate tax trap.

When the second spouse dies, all the property the survivor owns (which includes the inherited property) is subject to an estate tax.  The surviving spouse can only claim one personal federal estate tax exemption.

There is a way to get the benefit of two estate tax exemptions and still take care of the second spouse to die. Instead of leaving everything outright to each other, couples should leave assets in what is known as an A/B trust.

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#### Why should a married couple consider an a/b trust?

Q. What is an A/B trust?
A. Married couples can leave instructions in their will or in their living trust to establish new A/B trusts when the first spouse dies. In an A/B Trust, the marital assets are split and transferred to two separate trusts, known as trust “A” and trust “B,” created when the first spouse dies.

Q. What happens with trust “A”?
A. Trust “A,” which was set up by the surviving spouse, is a revocable trust.  The surviving spouse can be trustee and usually has total control over the assets in the trust.  The surviving spouse can generally do with the assets transferred to trust “A” whatever he or she pleases.

The surviving spouse decides who inherits the assets in trust “A” when he or she dies, and may change the names of the beneficiaries until he or she dies or becomes incapacitated.

Q. What happens with trust “B”?
A. Trust “B” is set up according to the instructions previously specified in the living trust of the deceased spouse. The new trust “B becomes an irrevocable trust upon the death of the first spouse.
The assets in trust “B” are managed according to the instructions specified in the decedent’s living trust agreement.  The trustee of trust “B” is the person the deceased specified in their living trust and commonly is the surviving spouse.

Usually, the income from trust B is used to support the surviving spouse and the principal is maintained for the benefit of the ultimate beneficiaries of the trust after the surviving spouse dies.  Since the trust “B” is irrevocable, the surviving spouse cannot generally change any terms or instructions defined by the first spouse to die.

Q. How does an A/B trust save on estate taxes?
A. The will or the living trust of the first spouse to die instructs the estate representative to transfer to Trust “B” property up to the maximum federal estate tax exemption allowable in the year of death.

When the surviving spouse dies, the property in Trust “B” is not part of his or her estate, regardless of its value. The deceased spouse’s estate only owes estate taxes on Trust “A” assets.

Setting up an A/B trust provides two tax advantages for married couples.  First, it allows each of them to claim the estate tax exemption.  Secondly, and just as important, it allows the assets in Trust “B” to grow and be distributed tax-free when the second spouse dies.

Q. What happens if the value of the assets of the first spouse to die exceeds the estate tax personal exemption allowance?
A. If the value of the property of the first spouse to die exceeds the federal estate tax personal exemption allowance, the first spouse to die has several choices.

Choice 1. If you want to control the distribution of the excess assets when the surviving spouse dies, your trust instructions can provide that the amount of your estate in excess of the estate tax personal exemption allowance should be placed in a new trust, commonly referred to as a “C” trust.

The trustee of the “C” trust must manage these assets according to your directions, which can be the same as directions you leave for the “B” trust. For instance, your instructions can direct any income be paid to a surviving spouse and upon his or her death, the “C” trust assets be given to your grandchildren.

Your estate representative must immediately pay estate taxes on the funds set aside in the “C” trust.  Similar to the “B” trust, the assets in the “C” trust can continue to grow but no additional estate taxes will be assessed at the time the “C” trust is distributed.

Choice 2. Your trust instructions can provide the excess assets be given to the “A” trust.  The excess assets will now be under the control of the surviving spouse.  The distribution of the assets will be done according to the terms of the “A” trust when the surviving spouse dies.

No estate taxes are due on the excess assets.  When the surviving spouse dies, all of the assets in the “A” trust will be subject to any applicable estate taxes.

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