Estate Tax

The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.

Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.

After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Presently, the amount of this credit reduces the computed tax so that only total taxable estates and lifetime gifts that exceed $1,000,000 will actually have to pay tax. In its current form, the estate tax only affects the wealthiest 2 percent of all Americans.

Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. The Estate Tax Exclusion changed in 2011 and is effective until 2012. The Estate Tax Exclusion for these years is $5 million. The first $5 million of an individual's estate passes on tax-free, after that, the estate tax rate is 35%. The exclusion amount for gifts is unified with the $5 million estate tax exemption, which means that an individual can gift up to $5 million the next two years without paying taxes on it. But if that individual were also to die in the next two years after giving away $5 million in lifetime gifts, then his entire estate would be taxed. The tax rate for any lifetime gifts given over $5 million is 35%.

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