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The federal estate tax is imposed
upon the total value of every deceased person's taxable
estate, which is generally the fair market value of all
the property that a person owns or has the right to
control at the time of death. Basically,
everything that a person owns is taxable, although it
may not actually be taxed.
Even though the federal estate tax is
imposed against everything that is owned, it is only
calculated against the "taxable estate" or the value of
all property that remains after the subtraction of all
allowable deductions.
Allowable deductions include the
deceased's debts, funeral expenses, the costs of estate
administration, and the value of any gifts made to
qualified charitable organizations. All property
that passes to a surviving spouse who is a U.S. citizen
is also deducted from the gross estate before the
federal estate tax is determined.
The IRS provides the following
definitions at its website, as well as much more detail
and official publications
HERE.
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Gross Estate
Your gross estate includes the value of all property in which you had
an interest at the time of death. Your gross estate also will include
the following.
1) Life insurance proceeds payable to your estate or, if you owned the
policy, to your heirs, 2) The value of certain annuities payable to
your estate or your heirs, 3) The value of certain property you
transferred within 3 years before your death, 4) Trusts or other
interests established by you or others in which you have certain
powers.
Taxable Estate
The allowable deductions used in determining your taxable estate
include:
1) Funeral expenses paid out of your estate,2) Debts you owed at the
time of death, and 3) The marital deduction (generally, the value of
the property that passes from your estate to your surviving spouse). |
Determination of Tax
The year of a person's death
determines the appropriate estate tax rate, along with
the appropriate unified credit amount. These two values
are used to determine the taxes that are owed against
the value of the taxable estate.
|
Year of Death |
Applicable
Exclusion Amount |
Unified Credit
Amount |
Top Tax Rate |
|
2007 |
$2,000,000 |
$780,800 |
45% |
|
2008 |
$2,000,000 |
$780,800 |
45% |
|
2009 |
$3,500,000 |
$1,455,800 |
45% |
|
2010 |
No estate tax |
|
2011 |
$1,000,000 |
$345,800 |
55% |
Tax Calculation - The Unified
Credit
As a tax credit, the unified credit
can only be applied when there is an actual amount of
tax that is owed. When tax is owed, the unified
credit is used to reduce or eliminate the amount of
federal estate tax that must be paid.
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Rather than calculate the amount of
federal estate tax that is owed against the entire
taxable estate, the applicable exclusion amount can
simply be subtracted from the taxable estate prior to
calculating the taxes. When using this method, the
taxes are only calculated against the amount of the
taxable estate that exceeds the applicable exclusion
amount, if any.
Taxable Estate
Greater Than the Applicable Exclusion
Where the
taxable estate is greater than the applicable exclusion
amount, Federal estate tax will be owed against the
value of the taxable estate that is greater than the
applicable exclusion amount.
Using 2008 as an example shows that
this calculation can be easily performed as follows:
|
Taxable Estate
Greater Than App. Exclusion Amount |
|
Taxable Estate |
|
$3,000,000 |
|
|
Minus Applicable Exclusion Amount
(2008) |
|
- $2,000,000 |
|
|
Amount Subject to Estate Tax |
|
$1,000,000 |
|
|
Multiplied by Tax Rate |
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x 45% |
|
|
Estate Tax Actually Owed |
|
$450,000 |
|
Taxable Estate Less Than the
Applicable Exclusion
Because it is a tax credit, any
amount of the unified credit that is not applied to
taxes which are actually owing will be lost.
As previously shown, the estate of
every person dying in 2008 receives a unified credit of
$780,800. However, those who owe an amount of
estate tax less than $780,800 will not receive cash back
from the IRS for the amount of unused amount of credit.
The example below shows the result of
a taxable estate that is less than the allowed credit:
The amount of the taxable estate that is subject to the
tax is merely reduced to zero.
|
Taxable Estate
LESS Than App. Exclusion Amount |
|
Taxable Estate |
|
$1,000,000 |
|
|
Minus Applicable Exclusion Amount
(2008) |
|
- $2,000,000 |
|
|
Amount Subject to Estate Tax |
|
$0 |
|
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Multiplied by Tax Rate |
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x 45% |
|
|
Estate Tax Actually Owed |
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$0 |
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In these circumstances, the deceased
does not receive payment for the amount of credit that
is not used. The unified credit is also personal, which
prevents any portion that is not used by an estate from
being transferred for use by any other person's estate.
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