WHAT IS THE FEDERAL ESTATE TAX?
Benjamin Franklin once said, “In this world nothing is certain but death and taxes.” Boy was he right. When you die, a special tax known as the estate tax comes into effect. Currently, less than 1% of the U.S. population owes federal estate taxes when they die.
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The EGTRRA laws governs the estates of someone who died between January 1, 2002 and December 31, 2010. The 2010 Tax Relief Act governs the estates of someone who dies between January 1, 2010 and December 31, 2012. Unless Congress passes new laws, someone who dies after December 31, 2012 must follow the rules in place in 2001.
The discussion below regarding estate tax is applicable in all calendar years except the year 2010. The last section below describes the special rules for someone who dies in the year 2010.
- What is the federal estate tax?
- What is the personal estate tax exemption allowance?
Is your estate subject to the federal estate tax?
- How do you calculate the estate tax value of your estate?
- How do you calculate the federal estate tax?
- Who pays the estate tax?
- Do states have an estate tax?
- What is the Deceased Spouse Unclaimed Exclusion Amount?
Can you remove life insurance proceeds from your taxable estate?
- How can the gift tax rules help reduce the size of your taxable estate?
Q. What is the federal estate tax?
A. 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 the federal personal tax exemption allowance?
A Federal laws allow you to transfer a certain amount of assets tax-free to your heirs when you die, referred to as your personal tax exemption allowance.
Q. What is the amount of the federal estate tax exemption allowance?
A.The 2010 Tax Relief Act establishes $5 million dollar estate tax exemption allowance for someone who dies in the years 2010, 2011 or 2013.
Unless Congress passes new estate tax laws before January 1, 2013, the estate tax exemption allowance revert to $1 million.
Q. Is your estate subject to the federal estate tax?
A. If the value of your assets exceeds the personal estate tax exemption allowance, your estate representative 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.
Q. Do states have an estate tax?
A. Prior to the 2001 estate tax 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.
Q. How do you calculate the value of the estate for estate tax purposes?
A. All of your assets are subject to the federal estate tax calculation. Assets include real estate, bank accounts, cash, motor vehicles, stocks, dons 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 interested in businesses and business property including shares in partnerships, joint ventures, farms, right to royalties, value of intellectual property, etc.
The gross value of your estate also includes the value of any gifts given away within two years of your death that exceeded the annual gift tax allowance, currently $13,000 per person.
Q. How do you calculate the taxable value of your federal estate tax?
A.The estate representative must make a list of property owned by the decedent 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 the decedent dies (or six months later if the value is lower than at date of death), not the price the decedent paid for it. Then, he or she must make a list of all the debts the decedent owed at your death.
If property is owned jointly with someone else, multiply the decedent’s ownership share times the fair market value to calculate the estate tax value of the property.
The taxable value of the estate is calculated by deducting the total amount of the debts from the total fair market value of all the assets.
If the taxable value of the property exceeds the personal estate tax exemption allowance, the estate representative must file a Form 706 Estate tax return and pay the appropriate tax due within nine months of death.
Q. How do you calculate the amount of estate tax due?
A. The amount of tax due is calculated by multiplying the estate tax rate applicable the year of death by the value of the decedent’s net taxable estate The maximum estate tax rate for the years 2010, 2011 and 2012 is 355%.
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 exceeding personal tax exemption allowance||Tax 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 $60,000|
|$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|
|$750,000 to $1,000,000||$155,800 plus 37% over $500,000|
|$1,000,000 to $1,250,000||$248,300 plus 39% over $750,000|
|$1,250,000 to $1,500,000||$345,800 plus 41% over $1,000,000|
|$1,500,000 to $2,000,000||$448,300 plus 43% over $1,500,000|
|$2,000,000 to $3,000,000||*$780,800 plus 49% over $2,000,000|
|Over $3,000,000||*$1,290,800 plus 55% over $3,000,000|
These are the published tax rates. However, Congress changed the highest estate tax rates for U.S. Citizens in 2010. Currently, the highest tax rate is 35%. The tax rates for estates in excess of $5 million would be 35%.
For example, assume the value of the estate subject to estate taxes is $5 million for someone who died in 2010. The amount of taxes due is $780,000 plus 4% of the value over $2 million.
Q. Who will pay the estate tax?
A. The estate of the decedent is responsible for paying any estate taxes due. The decedent can leave instructions on what assets should be used to ay the tax. If not, the estate representative will decide how best to pay the taxes due.
When thinking about who gets what, consider the impact federal estate taxes and state inheritance taxes will have on your estate, and how estate taxes change the value of the bequests.
Q. Do states have an inheritance tax?
A. Some states have an inheritance tax, a tax imposed on beneficiaries who inherit property. If 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.
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 beneficiaries.
Many spouses do not collect inheritance taxes from spouses or children.
Q. Do states have an estate tax?
A Prior to the 2001 estate tax 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. Like the federal estate tax, state estate taxes are paid for by the decedent’s assets.
Q. What is the Deceased Spouse Unclaimed Exclusion Amount (DSUEA)?
A. Before the 2010 Tax Relief Act created the DSUEA form, the only way a married couple could preserve the estate tax exemption allowance of the first spouse to die was to spend time and money in setting up an A/B trust.
The surviving spouse of someone who dies in the year 2011 or 2012 can now just file Form 706 with the Internal Revenue Service and claim the right to the deceased spouse unclaimed exclusion amount. When the surviving spouse dies, his or her estate representative can combine the last spouse to die $5 million personal estate tax exemption allowance with the first spouse to die deceased spouse unused exclusion amount.
The ability to transfer the estate tax exemption to the surviving spouse is sometimes referred to as portability. The net effect is it gives married couples the right to exclude $10M of assets from federal estate taxes.
Q. Are the proceeds from life insurance part of your taxable estate?
A. If you are the owner of the policy, or can designate beneficiaries, life insurance proceeds are considered part of your taxable estate. Owning a sizable life insurance policy can trigger or greatly increase federal estate taxes.
Q. How can you use gift tax rules to minimize the value of your taxable estate?
A. Gift taxes allow you to give a way a certain amount of each money tax-free. The gift tax law are comprised of three sets of tax giving rules: the annual gift tax exclusion, direct gifts for education and medical expenses, and the $1 million tax-free gift allowance.
Great article and clarification on gift and estate taxes, they are such an ever changing set of tax laws.
AMLLP also has a great article on their site explaining the new gift and estate tax changes for future income tax planning and who they could possibly affect.
I am not sure I understand your question.
If you are a beneficiary, your inheritance is not subject to any federal estate taxes. So, you do not owe any federal estate taxes and would not need to claim any tax exemption allowance.
The person who dies is subject to federal estate taxes if the total value of their estate excludes the federal tax exemption allowed the year of death. The amount of the federal estate exemption allowance in 1986 was $500,000.