Estate tax is a tax on the transfer of property from one individual to another at the time of death. While most estate tax is excised by the federal government, many states also impose an estate tax. On average, approximately 2% of estates incur some type of estate tax.
The tax liability amount will depend on the fair market value of the taxable estate (the gross estate, less any allowable deductions). In general, if the estate has a total taxable value of $3.5 million or less for 2009, the estate should not be subject to estate tax. As a result of the Tax Relief Reconciliation Act of 2001, the federal estate tax is due to be phased out by 2010. Therefore, in 2010, there will be no estate tax regardless of the size of an estate. A sunset provision will reinstate the estate tax in 2011, with an applicable exclusion amount of $1,000,000.
How is Estate Tax Derived?
Calculating the amount of tax due on the transfer of property at the date of death begins with the value of the gross estate. The gross estate can include an aggregate of the assets owned by the decedent, including an interest in the following:
- Cash and securities;
- Life insurance proceeds paid to the estate;
- Real estate;
- Business interests, and/or
- Certain annuities.
Deductions are allowed that can reduce the gross value of the estate. These deductions include unpaid mortgage balances, court costs, attorney fees, funeral expenses and claims against the estate such as unpaid debts.
In addition to the allowable deductions from the gross estate, two other deductions are allowed—the marital and charitable deductions:
- Unlimited Marital Deduction: A deduction is allowed for the value of includible qualifying property that passes directly from the decedent to a surviving spouse. There is no limit on the amount of assets that can be transferred to a surviving spouse.
- Charitable Deduction: Deductions are allowed for the value of a decedent’s property that is transferred to a qualified charity, but first, the property must be included in the gross estate.
To further reduce the taxable estate, federal law allows for an estate tax exemption, which basically exempts a portion of the estate’s value from being taxed. For instance, in 2009, an estate valued at up to $3.5 million would not be subject to estate tax. In 2010, there will be a total exemption from the estate tax; however, beginning in 2011, the federal estate tax exemption amount returns to $1 million, as it was in 2002.
Filing the Estate Tax Return
Once the taxable estate has been derived, the value of lifetime taxable gifts is added, then the tax rate is applied. Estate tax rates can range from 18% to 45% in 2009. In 2011, the estate tax rate will be reset to 55%. While an estate tax return is due nine months after the date of death, a six-month extension is available.
Step Up in Basis
Although estate taxes can be significant, some relief can be found in what is called the “step up in basis” for assets owned and transferred at death. The fair market value of assets transferred at death are stepped up (or down) to the value as of the date of death, or an alternate valuation date if the estate is eligible. Thus, capital gains taxes on property highly appreciated before death could be significantly reduced when sold by a beneficiary.
For more information, please consult with your estate planning attorney and/or tax consultant. You may also contact Henssler Financial at 770-429-9166 or [email protected].