Estate Tax Rates and Exemptions

The old adage goes that the only sure things in life are death and taxes — but the disappearing and reappearing federal estate tax proves the adage wrong. The future of federal estate tax is all but certain.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided for estate tax relief from January 1, 2002 through December 31, 2010. Under the Act, the estate tax was gradually reduced from a maximum estate tax rate of 55 percent for estates larger than $1 million in 2001, to 45 percent for estates larger than $3.5 million in 2009, to no estate tax in 2010. After December 31, 2010, the estate tax was scheduled to revert to its 2001 level — a maximum rate of 55 percent for estates larger than $1 million. However, on December 17, 2010, President Obama signed the 2010 Tax Relief Act extending estate tax relief for another two years, from January 1, 2011 through December 31, 2012. Under the 2010 legislation, the maximum estate tax rate is 35 percent for estates larger than $5 million ($10 million for married couples). If Congress fails to enact legislation further extending estate tax relief, the estate tax will revert to its 2001 level on January 1, 2013.

Probate Estate versus Federal Taxable Estate

The “probate estate” includes the property of the person dying whose titles are in the name of the person dying or his or her estate (such as houses, cars or bank accounts that are only in the name of the person dying). The title to these probate assets has to be changed to someone other than the deceased — this is the purpose of probate. The size of the probate estate has nothing to do with the size of the federal taxable estate. The probate estate generally is smaller than the federal taxable estate. The taxable estate includes all property owned by you or by a trust you control outright, or by a trust to which you have significant “strings attached,” qualified retirement plan proceeds, and life insurance proceeds, if the policy is owned by the deceased.

Lifetime Gifts

The gift tax is a tax on the transfer of property, including money, by gift to another individual during your lifetime. The individual who gives the gift, the donor, is primarily liable for the payment of any federal gift tax.

Certain gifts are exempt from taxation. Exempt gifts include:

  • Gifts of a present interest worth $13,000 or less to any one individual in any one year (this amount is for 2010, and it is periodically adjusted for inflation)
  • Gifts to a spouse
  • Tuition or medical expenses paid on behalf of someone else directly to the educational or medical institution
  • Charitable contributions
  • Certain gifts to political organizations

If a donor’s gift exceeds the exemption amount, the donor must file a gift tax return. It is possible, however, that the gift may not be subject to tax due to application of the unified credit, which applies to both estate and gift taxes. The donor, assuming he or she has not previously exhausted the unified credit, would apply the unified credit amount to the tax on the gift and result in a tax liability of zero. The only cost to the donor is a reduction of the unified credit amount available for future gifts or for use against estate taxes upon the donor’s death.

Under the 2010 Tax Relief Act, the gift tax rate was set at 35 percent for tax years 2011 and 2012, and the exemption was substantially increased from $1 million to $5 million ($10 million for married couples). If Congress fails to enact legislation further extending gift tax relief, the maximum gift tax rate and exemption will revert to their 2001 levels — 55 percent and $1 million, respectively — on January 1, 2013.

Income Tax and Estate Tax Returns

A final United States income tax return must be filed on behalf of the deceased. A federal estate tax return must be filed for every estate where the estate exceeds the applicable exemption.

Working with an Estate Planning Lawyer

It is important to determine if your state has a state inheritance or estate tax to consider. An accountant and a tax attorney can assist you in preparing federal and state tax returns for the deceased, as well as helping you prepare the many other documents that are necessary to close out the deceased’s estate.

Copyright © 2011 FindLaw, a Thomson Reuters business

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.

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