Summary
This page discusses what constitutes a taxable estate. It also describes federal estate, gift and GST tax rates.
When someone passes away, federal taxes and often state taxes will be assessed. The state estate tax will vary widely by state. Please see your local tax or legal professional for state-specific estate tax questions. A general overview of the federal estate tax is provided here for general information purposes.
How Estate Taxes are Calculated
Estate tax is generally calculated per the following:
Debts of Decedent
Adjusted Tentative Estate Estimated
Gross Estate - Admin Expenses = Gross x Tax - - Tax = Estate Taxes Due
Estate Credit
Charitable
Deduction
Marital deduction
The Gross Estate
The gross estate is the starting point in calculation of the federal estate tax. Basically, you start with the gross estate, subtract expenses and other allowed deductions, and then add certain taxable gifts. The gross estate is the value of the property owned by the decedent on the decedent’s date of death. Property that would be included in the gross estate includes:
all included if owned with another person (unless proven that actual ownership is otherwise)
half included if owned jointly with spouse
Life insurance proceeds paid to the estate or where the policy was owned by the decedent
- IRAs and other retirement accounts
- Transfers where the decedent retains a life estate or has the power to revoke the transfer, e.g. revocable living trust
Certain gifts transferred within 3 years prior to death, e.g. a life insurance policy ownership transferred to another owner
Deductions
The gross estate can be reduced by certain permissible deductions. Such deductions include:
Charitable deductions
Gifts given to a charitable organization as defined by Internal Revenue Code 501 (c)(3).
Marital deductions
Unlimited assets can pass to decedent’s surviving spouse, free of estate tax at time of decedent’s death. Estate tax may be paid on those assets remaining at the death of the surviving spouse.
Administrative expenses and debts of decedent
An estate may have a variety of costs. Such costs include probate administration and debts on the estate property.
Estate/Gift Tax Rates
The unified tax credit is a lifetime tax credit of $345,800 on gifts or your estate. During one’s lifetime, if gifts are made, that credit is reduced according to the size of the aggregate total of taxable gifts. The amount of unified credit the decedent had used during his or her lifetime will reduce the allowed estate tax exclusion.
Under current law, every taxpayer is allowed to transfer a certain amount of assets free of federal gift and estate taxes. A law, which is only effective from 2002 through 2010 (unless Congress enacts new legislation prior to December31, 2010) makes several changes. See Gifting for more information.
The estate tax exclusion amount and the estate and gift tax rates are:
Year | Estate and GST tax deathtime transfer exemption | Highest Estate and gift tax rates |
2001 | $675,000 | 55% |
2002 | $1 million | 50% |
2003 | $1 million | 49% |
2004 | $1.5 million | 48% |
2005 | $1.5 million | 47% |
2006 | $2 million | 46% |
2007 - 2008 | $2 million | 45% |
2009 | $3.5 million | 45% |
2010 | Repealed | Top Income Tax Rate (gift tax only) |
In addition to the unified credit, the federal tax allows a state death tax credit based upon IRS tables. The gift tax applicable exclusion amount is planned to stay at $1 million for all years above.
Generation Skipping Transfers (GST) Tax
For those individuals wishing to leave a gift of over $2 million to grandchildren or others at least a generation away, generation skipping transfers (GST) tax will also be imposed. This tax stems from the government’s interest in taxing each generation. The GST tax is imposed when the next generation (children) is bypassed in favor of a later generation (grandchildren). The current GST tax rate is 46% and applies to gifts and transfers by death. Certain exemptions to the GST tax may be available. Clients should speak with their tax or legal professional regarding available GST tax exemptions.
Strategies for Reducing the Taxable Estate
Several strategies are available to assist individuals in reducing their taxable estate, with the purpose of reducing estate tax liability. These strategies include incorporating the following into one’s estate plan, when appropriate: