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The Federal Estate Tax has been repealed, right? WRONG!May 31 '01 (Updated Jun 08 '01) Write an essay on this topic.The Bottom Line Under President Bush's new tax plan, 2010 is the best year to die. Find out why. Now that President Bush's tax package has passed, the Federal Estate Tax has been repealed, right? Wrong! It won't be eliminated until 2010, and then only for one year unless a future congress votes to extend the repeal. So, knowing a bit about the estate tax is as important as ever. Your Estate Your estate is everything you own: your house, car, stocks and bonds, businesses, annuities, life insurance proceeds, etc. The value of your estate is the aggregate value of all these things less the sum of everything you owe. It's roughly the same as your net worth, which is often defined as your assets less your liabilities. The Federal Estate Tax The Federal Estate Tax is a tax levied on the value of your estate after you die and before the remainder passes to your heirs. Because of when it's levied, it's sometimes called the death tax or inheritance tax. Technically, no person actually pays the estate tax; it's paid by your estate, which is just a legal entity. There are two crucial points to remember about the estate tax: 1. The portion of your estate that you pass to your spouse is exempt from estate tax. If you give your entire estate to your spouse, there is no estate tax at all (although this may not be a wise thing to do for reasons not discussed here). 2. Under the old law, only the portion of your estate exceeding $675,000 was subject to tax (this would have gradually increased to $1 million in 2006). Under the new tax law passed in May 2001, this exempt amount will increase to $1 million in 2002, $1.5 million in 2004, $2 million in 2006, and $3.5 million in 2009. The estate tax will be repealed in 2010, but then reinstated in 2011, complete with the old exemption amounts, unless a future congress acts to change the law. So, if you want to pass on a large estate without paying any tax, be sure to die in 2010. Hanging on 'til 2011 could cost you big. Thus, under both the old and new law, it was possible to pass fairly large estates to your heirs without paying any tax. In fact, in the last few years, fewer than one in fifty estates paid any tax under the old law, and this will obviously decrease under the new law. Under the old law, with proper advance planning, a couple with two children could pass more than $3 million from parents to children with no estate tax. Under the new law, this tax free amount will increase. Computing The Estate Tax This section is greatly simplified, but gives the flavor of the tax computation. Of course, you won't be doing this yourself, since all of it will happen after you die. First, add up the value of all your assets and subtract any amounts you owe, such as mortgages, auto loans, credit card debt, etc. When property is owned jointly, remember to count only your share. This figure is called your gross estate. Next, deduct the value of all property you leave to your spouse, your funeral expenses, expenses of administering the estate, and charitable contributions made from the estate. This figure is called your taxable estate, and for about 98% of us, it will be zero. If the taxable estate is other than zero, use the estate tax table to determine the amount of tax. Certain credits may be subtracted from the tax amount. A Few More Quick Points The discussion here is a great simplification for several reasons. First, the estate tax is really an estate and gift tax that covers both lifetime gifts and gifts after death in a single tax structure. In order to minimize one's estate tax, a program of tax free lifetime gifts to one's intended heirs is crucial. Second, many states have estate or inheritance taxes. The tax rates are much lower than the federal rates. Generally, any amount you pay to a state may be taken as a credit against the amount you would have paid in Federal Estate Tax. Thus, the existence of state inheritance taxes does not increase the total tax due on the estate. The phaseout of the federal estate tax has no effect on the state inheritance taxes. Third, there is much more you need to know about estate planning in order to minimize your estate taxes. Nolo Press's books on the subject are an excellent source of tax and legal education.  |
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