Estate Tax

Has high rates, but there are ways to minimize the bite

Estate tax in the United States is imposed by the federal and some state governments on the value of property that is transferred at death.

Who Pays?

The estate pays the tax. It is not a tax on the beneficiary's right to receive the property. However, to the extent that the tax is paid from the estate to the government, less is available to pass to the beneficiary, so beneficiaries often mistakenly assume that they are paying the tax.

At the start of the reform process in 2001, about 2% of US taxpayers actually pay this tax.

How is the Estate Tax Calculated?

In general terms, the value of property that a person owns or controls at death is the starting point.

Then the exclusion amount is deducted. This amount is set by the law: in 2001 it was $675,000 and that increases each year to 2009 when it is $3.5 million. It might become $1 million again in 2011, depending on Congress' actions.

The taxable value does include the value of retirement plans, home equity, life insurance proceeds if they are payable to the estate, and shares owned in a family business, so you might need a business valuation. It even includes the amounts that a lottery winner might not have yet collected if they were taking payments over the typical 26 years instead of in a lump sum when they won. So, one can get above the exemption pretty quickly without careful planning.

The tax rate, which varies from 39% to over 50% , is then applied to the taxable value to determine estate tax payable. In cash. Within 9 months from date of death. It's up to your executor - and you when you are planning! - to figure how to get the cash to pay the government, which doesn't care a bit if your estate has to sell assets to raise the cash to pay.


Disclaimer

Our intent is to describe estate planning scenarios and solutions. We do not provide advice - for advice you should consult professionals such as attorneys and accountants.

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