Federal Estate Tax Basics
The Eiffel Tower is the Empire State Building after estate taxes. - K. Kong
Taxes related to estate planning are a many splendored thing. Three things to be exact.
Although there is a separate federal estate tax, tax liability is computed on the basis of what is called the federal unified transfer tax. The unified transfer tax is made up of three distinct, but closely related, taxes: the estate tax, the gift tax and the generation skipping transfer (GST) tax. Both the federal gift tax and the GST tax have their own set of rules and planning strategies, but for purposes of this discussion, we'll only briefly introduce them and point out their main purpose: to prevent avoidance of the estate tax. Without the gift and GST taxes, individuals - particularly wealthy individuals - could get out of paying the estate tax by making lifetime transfers.
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Did You Know?
The federal estate tax is an excise tax levied on the transfer of a person's property at the time of the person's death. It is not a tax on the property itself or a tax on the privilege of an heir to receive the property. A tax by any other name still stinks, though.
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The unified transfer tax is computed with reference to the value of the property that is considered to be in your gross estate at death, and to the value of taxable gifts that you made during your life. Generally, if the total of your lifetime taxable gifts and the value of the property that you own as of the date of your death exceeds $2 million (for 2006 through 2008), a transfer tax liability may be owing on amounts that exceed this figure. If this tax applies, it will be steep: the maximum tax rate that will apply in 2007 and 2008 is 45 percent!
New federal estate tax laws are in effect since 2002. During the course of a phase-out period that ends in 2010, the new estate tax laws raise the estate tax exemption amounts, lower the top estate tax rate and eliminate the estate tax entirely in 2010. Unless Congress steps in with some subsequent legislation, however, the pre-2002 tax laws will be resurrected and be in full force in 2011. The following is a breakdown of the federal estate taxes for each year:
| Phase-In of Estate Tax Changes |
| Year |
Maximum Estate Tax Rate |
Estate Tax Exclusion Amount |
Estate Tax Unified Credit |
Gift Tax Unified Credit |
Gift Tax Exclusion Amount |
GST Exemption |
| 2001 |
55% (plus 5% surcharge) |
$675,000 |
$220,550 |
$220,550 |
$675,000 |
$1,060,000 |
| 2002 |
50% |
$1 million |
$345,800 |
$345,800 |
$1 million |
$1,100,000 |
| 2003 |
49% |
$1 million |
$345,800 |
$345,800 |
$1 million |
$1,120,000 |
| 2004 |
48% |
$1.5 million |
$555,800 |
$345,800 |
$1 million |
$1.5 million |
| 2005 |
47% |
$1.5 million |
$555,800 |
$345,800 |
$1 million |
$1.5 million |
| 2006 |
46% |
$2 million |
$780,800 |
$345,800 |
$1 million |
$2 million |
| 2007 |
45% |
$2 million |
$780,800 |
$345,800 | $1 million |
$2 million |
| 2008 |
45% |
$2 million |
$780,800 |
$345,800 |
$1 million |
$2 million |
| 2009 |
45% |
$3.5 million |
$1,455,800 |
$345,800 |
$1 million |
$3.5 million |
| 2010 |
35% (gift tax only) |
estate tax repealed |
estate tax repealed |
$345,800 |
$1 million |
GST tax repealed |
| 2011 |
55% (plus 5% surcharge) |
$1 million |
$345,800 |
$345,800 |
$1 million |
$1,060,000 (indexed for inflation) |
If you notice from the table above, the unified credit will no longer be truly unified starting in 2004. From 2004 and going forward, the estate and gift tax applicable exclusion amounts will differ as indicated above.
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