Tag Archives: federal estate tax

Estate Tax Update

Current estate tax laws:

In 2001, Congress passed the existing federal estate tax laws.   The 2001 legislation gradually raised the federal estate tax exemption allowance from $1 million to $3.5 million and reduced the estate tax rate from 55 percent to 45 percent.    

In 2009, the federal estate exemption allowance is $3.5 million and the top federal estate tax rate is 45 percent.  

In the year 2010, no one would owe any estate tax, no matter what the value of your estate was. 

In the year 2011, the estate tax rules would revert to the laws existing in 2001.   In 2001, the federal estate exemption allowance was $1 million and the estate tax rate was 55 percent.

2010 Congressional Budget Resolution

In May, 2009, the House and Senate each approved the 2010 Congressional Budget Resolution.   Language within this bill extends the 2009 estate tax exemption allowance of $3.5 million and the top estate tax rate of 45 percent for the year 2010 and beyond.    Like the current laws, the exemption is for an individual.  Married couples would need to do some tax planning in order for their estate to exempt $7 million of their estate from estate taxes.

The budget resolution is not law, but suggests there is agreement in both the Senate and the House to extend the existing 2009 estate tax rules into 2010 and beyond.

Under 2009 law, the Urban-Brookings Tax Institute Policy estimates 97.5% of all estates will not be subject to estate tax.

An Act of Congress describing the details of the estate tax changes and making such changes the law is expected before the end of 2009.

 

Estate Tax: Senate Bill 722

The 2010 Congressional Budget Resolution recommends a personal estate tax exemption allowance of $3.5 million. The value of estates above that would be taxed at 45%. However, the language in the Budget Resolution does not provide for the “portability” of the $3.5 million allowance to a surviving spouse. Without “portability”, the proposed estate tax laws extend the existing married couple estate tax trap.

Existing estate tax rules

What is the existing married couple estate tax trap? Assume a husband and a wife each have property worth $2.5 million. The wife dies first and her will leaves $2.5 million of her assets to her surviving husband. When the husband dies, his estate now includes assets he owns and assets given him when his wife died. The estate tax value of the second spouse to die is $5 million. However, under existing tax laws, the second spouse to die can only claim his $3.5 million exemption. The estate would owe taxes on $1.5 million.

To avoid the married couple estate tax trap, many married couples spend time and money establishing an AB trust. The AB trust enables both couples to claim their $3.5 million tax exemption allowance, and exempts a total of $7 million from estate taxes.

Senate Bill 722

On March 26, 2009, Senator Max Baucus introduced the Taxpayer Certainty and Relief Act of 2009 (S. 722).

Senate Bill 722 provides “portability” of the estate-tax exemption allowance to the surviving spouse. Let’s take the same example. Assume a husband and a wife each have property worth $2.5 million. The wife dies first and her will leaves $2.5 million of assets to the surviving husband. When the husband dies, his estate now includes assets he owns and assets given him when his wife died. The estate tax value of the second spouse to die is $5 million. The “portability” of the estate tax exemption allowance would allow the surviving spouse to claim the $3.5 million exemption allowance available to the first spouse to die and his own $3.5 million exemption allowance.

The “portability” clause would exempt $7 million of the estate of a married couple  from any taxation. The value of estates above $7 million would be taxed at 45%. This portability would eliminate the need for married couples to set up an AB trust in order for each couple to claim their individual estate tax exemption allowance.

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.

What is the taxable value of your estate?
What is the federal estate tax personal exemption allowance?
What are the federal tax rates?
How do you calculate the federal estate tax due?

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.

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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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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