An estate tax is a tax on the right of the deceased to transfer property to his heirs or beneficiaries. Often called a death tax, estate tax is levied on the nonexempt portion of an estate before any portion of the estate is distributed. The federal estate tax is based on the total value of all property and other assets owned by the deceased at death. The estate tax must be paid by the executor, administrator or personal representative of the estate within nine months of the deceased's date of death. Property left to a surviving spouse who is a U.S. citizen is exempt from federal estate tax.
Estate tax may also be levied at the state level, depending on the laws of the state where the decedent was domiciled at the time of death.
What Was the Federal Estate Tax for 2009?
For 2009, the federal estate tax exemption was 3.5 million dollars per individual. If the combined gross assets and prior taxable gifts of an individual dying in 2009 exceeded 3.5 million dollars, the federal estate tax rate was 45 percent.
Generation-Skipping Transfer Taxes
For information on generation-skipping transfer taxes, also known as the GSTT, and your estate, visit our Generation-Skipping Transfer Tax page.
How to Reduce Estate Taxes
There are several ways to reduce your potential estate tax liability to ensure your children, heirs or other beneficiaries receive more of your estate. If you are concerned about losing a portion of your estate to the government through taxes, consult a tax accountant or an estate planning attorney about gifting, charitable donations, tax saving trusts, and other planning strategies to reduce your estate taxes. See gifting, charitable giving, and conservation easements for more information.
Estate Tax Planning for Small Business Owners
If you are the owner of a small business, it is especially important to be aware of your potential federal and state estate tax liability. Some small businesses will exceed the estate tax exemption resulting in a large tax bill after the death of an owner. Without an effective estate tax plan and business succession plan, business assets or the entire business may have to be sold to pay tax bills. With the help of a tax professional and a lawyer, you can use estate planning methods such as trusts, partnerships, and life insurance to ensure your business can continue after you are gone.
U.S. Master Tax Guide 2012 published by CCH Tax Law Editors. This comprehensive tax manual is the preferred reference guide for CPAs, financial planners, tax preparers, and estate planning attorneys. In addition to the sections on income taxes, it provides excellent coverage of federal estate, gift, and generation skipping transfer taxes.
Federal Estate Tax for 2010, 2011, and 2012
On December 17, 2010, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into federal law. In addition to revising the federal estate taxes for 2011 and 2012, this law revised the federal estate tax rules for 2010.
The federal estate tax is no longer repealed for 2010. It is reinstated for 2010. Under the new law, the top federal estate tax rate is 35 percent and it applies to estates which exceed the exemption amount of $5,000,000 per person and $10,000,000 per married couple. However, estates of decedents who died in 2010 have another option. They can choose to file using the rate and exemption amount under the tax law that existed prior to December 17, 2010, under which no federal estate tax is due, provided that estates choosing this option must use the modified carry over tax basis under the old law for property inherited from the decedent’s estate.
For 2011, the exemption amount is $5,000,000 per person with a top federal estate tax rate of 35 percent. For 2012, the exemption amount is $5,000,000 per person, indexed for inflation, with a top federal estate tax rate of 35 percent. The new tax law provides that beneficiaries inheriting property from individuals who die in 2011 and 2012 will receive a step-up in basis to fair market value.
The new tax law contains a federal estate tax portability provision which allows a surviving spouse to make an election to use the unused portion of the first deceased spouse’s exemption to reduce estate taxes.
The short time period covered by the current estate tax law makes it extremely difficult to make tax-related estate planning decisions. It is currently unclear what the estate tax exemption amounts and tax rates will be for 2013 and beyond. Communicate with your estate planning attorney or CPA regularly to stay abreast of the latest developments.
In addition, you should evaluate the state estate taxes and/or inheritance taxes that may be apply to your estate. Depending on state laws, the impact of state taxes on your estate and your heirs could be significant. Many people confuse estate taxes with inheritance taxes. The states are struggling for revenue, just like the federal government, so changes to state inheritance taxes could occur at any time. To learn more, see Inheritances.
Estate and Gift Tax Guides
The U.S. Master Tax Guide 2012 provides guidance on tax issues affecting individuals, trusts, estates, charitable organizations, partnerships, and corporations. The U.S. Master Tax Guide 2012 also features tax rates, checklists, and special tax tables. If you prefer a tax manual focused exclusively on estate, gift, and GST taxes, choose the U.S. Master Estate and Gift Tax Guide .
U.S. Estate Tax Resources
For a broader overview of the U.S. estate tax and a list of resources, see Estate Tax Information.
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