Estate and Gift Taxes
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, only 2% of the U.S. population owes federal estate taxes when they die.
The current estate tax laws are scheduled to to expire in 2011 when estate tax exemptions and rates will revert to those in effect for deaths occurring prior to 2002. New estate tax laws are expected to be passed in 2009 based upon the language included in the May, 2009, congressional budget resolution passed by Congress. This language sets the tax rates and the personal estate exemption allowance at the 2009 levels. The 2009 personal exemption allowance is $3.5 million and the highest tax rate is 45%.
The budget resolution is non binding, but reflects the thoughts of a majority of lawmakers in both the House of Representatives and the Senate. Congress will vote later this year on whether these provisions become permanent, or some other type of tax laws are enacted.
- 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 married couple estate tax trap?
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 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 present state of the tax laws concerning estate taxes is confusing.
If someone dies in 2009, the federal tax exemption allowance is $3.5 million.
Current tax code eliminates the estate tax in the year 2010, and reverts to the tax code in place in the year 2001.
Congress is expected to pass new tax laws this year for the year 2010 and thereafter. The current budget resolution extends the $3.5 million tax allowance allowed in 2009 to 2010.
Some proposed rules set the $3.5 million as the new permanent federal tax exemption allowance. Expect action later this year on what the federal tax exemption allowance will be after the year 2010.
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 current estate tax rate is 45%.
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 2001. Currently, the highest tax rate is 45%. The tax rates for estates in excess of $2,000,000 would be 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 $780,000 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 married couple estate tax trap?
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 allowance 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 other assets owned by the surviving spouse, including those inherited from the first spouse.
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 personal tax allowance available the year of death.
When the second spouse dies, all the property the survivor owns (which includes the inherited property from the first spouse is subject to estate tax. The surviving spouse can only claim his or her personal tax allowance.
Married couples can leave instructions in their will or in their living trust to establish new A/B trusts when the first spouse dies, enabling both spouses to claim their personal tax exemption allowance.
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.
