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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.
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.
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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 |
|
x 45% |
|
|
Estate Tax Actually Owed |
|
$450,000 |
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Taxable Estate Less Than the
Applicable Exclusion Amount: 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 |
|
|
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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Intestacy CalculatorsTM
You can see the dollar value of your intestate
estate that will be
given to your surviving spouse by opening the Intestacy CalculatorTM
for your state of permanent residence and each state where you own any real estate.
(If you live and own real estate in the same state, the same program
performs both calculations.)
You can also open the
Federal Estate Tax Calculator to see the amount of tax due this year.
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