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. Nonetheless, it is a tax that potentially reduces the amount of property available for transfer.
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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, including 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 $3.5 million in 2009 (or 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, 2008 and 2009 is 45 percent!
A new federal estate tax law has been in effect since 2002. During the course of the phase-out period that ends in 2010, the new law has raised the unified credit and applicable exclusion amounts, lowered the highest marginal estate tax rate, and, in 2010, eliminates the estate tax entirely. 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 Applicable Credit |
Gift Tax Applicable Credit |
Gift Tax Exclusion Amount |
GST Tax 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 applicable credits and exclusion amounts for gift and estate taxes were prior to 2004. From 2004 and going forward, the estate and gift tax applicable credits and exclusion amounts differ as indicated above. Things are likely to change before the table above goes into effect for 2010 and 2011.
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