Estate and inheritance tax

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According to the U.S. Internal Revenue Service, 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." [1] In addition to federal taxation, some states also impose an estate tax or an inheritance tax on property transfers at death. [footnotes 1]


Imbox notice.png Estate taxation, including issues involving trust and property titling and transfer, often require professional guidance.


Assets included in the gross estate

In the U.S. an individual's gross estate consists of the total fair market dollar value of all property and assets in which an individual had an interest at the time of his or her death. The gross estate figure is the gross value of a person's estate before liabilities such as debt and taxes are deducted. [2]

In addition to assets included in an individual's net worth, the gross estate includes assets such as the death benefit value of life insurance (owned or controlled by an individual) as well as certain additional property interests. In addition, how property is titled, for example, as sole property or the variations of joint property, determine what needs to be included in the gross estate. The table below shows how many types of commonly held property are valued in the gross estate.

The Gross Estate [3]
Property Solely owned Note (a) Joint with Survivorship
(Spouse)
Joint with Survivorship
(Non-spouse) Note (b)
Tenancy in Common
Bank Accounts 100% 50% 100% proportionate interest
Investment Accounts Note (c) 100% 50% 100% proportionate interest
Stocks and Bonds (Certificate) 100% 50% 100% proportionate interest
US Savings Bonds 100% 50% 100% proportionate interest
Personal Effects 100% - - -
Automobiles, Boats, Planes 100% 50% 100% proportionate interest
Monies owed to you 100% - - -
Life Insurance Note (d) 100% - - -
Retirement Accounts Note (e) 100% - - -
Closely Held Business Interests Note (f) 100% - - -
Real Estate 100% 50% 100% proportionate interest
Taxable Lifetime Gifts 100% - - -

Note (a): Solely owned: If the account is in your sole name (including payable on death accounts) or in your Revocable Living Trust, the entire value is included.
Note (b): Joint survivorship (with non-spouse): 100% of the value is included unless it can be proven that the other account owners made contributions to the account.
Note (c):Investment Accounts - Including brokerage accounts and mutual funds.
Note (d): Life Insurance: If you own the policy on your own life, 100% of the proceeds are included; if you own the policy on someone else's life, only the cash value is included. Life insurance owned by you and transferred into an Irrevocable Life Insurance Trust within 3 years of your date of death is included in your estate.
Note (e): Retirement Account: includes Roth and Traditional IRAs; Simple and SEP IRAs; 401(k)s; 403(b)s and annuities; 100% of the value is included.
Note (f): Closely Held Business Interests: includes sole proprietorships, partnerships, limited liability companies and stock held in closely held corporations. The value of your ownership interest is included.

529 plan estate benefits

529 Plans confer a potential estate tax benefit to donors. Contributions to a 529 Plan are removed from the donor's estate and are transferred to the estate of the beneficiary. All yearly contributions below the $13,000 per recipient gift tax provision are removed from a donor's estate, and a special tax provision allows donors to donate up to $65,000 to a 529 plan in a single year without incurring gift tax. The donation is, for gift tax purposes, spread over the ensuing five years. The donations (prorated) are only brought back into the donor's estate if the donor dies or terminates the account within the five year extended period. [4] If married, you and your spouse can "split gifts" and give $26,000 per recipient, and $130,000 for spreading the gift over five years. If you select the five year program you must elect it by filing IRS Form 790 [5] You must also file this return for any year your gift to a beneficiary exceeds the annual gift tax exclusion limit. You must also file the 709 for any year in the five year spread period if you make any additional gift to the beneficiary. [6]

Estate tax rates

Federal exemptions and tax rates

Each U.S. citizen has a lifetime estate tax exemption that allows a tax-free transfer of a set dollar amount to beneficiaries. In 2012, the exclusion amount totals $5.12 million dollars per person.

Special rules for married couples. For deaths in 2011 and 2012, a surviving spouse can retain use of any unused portion of a deceased spouse's individual tax exemption. In 2012 this gives the couple a total $10.24 million exemption, split between them in any way that provides the greatest tax benefit.

Example: Dr. Smith leaves $4 million to his widow; no estate tax is owed because property left to a spouse is tax-free. The widow then dies, leaving $7 million (her own $3 million plus the $4 million she inherited from her husband) to their children. Her estate won't owe any estate tax, even though the estate is over the exemption amount, because the estate can use $2 million of the husband's unused exemption. To take advantage of this provision an estate tax return must be filed when the first spouse dies--even if no tax will be due. [7]

The following table provides the federal exemption and estate tax rates for U.S. taxpayers subject to the estate tax. [footnotes 2]

Year Exclusion Amount Maximum /
Top tax rate
2001 $675,000 55%
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 Repealed[footnotes 3] 0%
2011[8] $5 million 35%
2012 $5.12 million 35%
2013[9] $5.25 million 40%

The taxable estate

If the gross estate is subject to estate tax, the following deductions are allowable for determining the taxable estate: [10]

  • Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass "outright." In some cases, certain life estates also qualify for the marital deduction. The marital deduction is not allowed to non-citizen spouses. (I.R.C. § 2056(a). [footnotes 4]
  • Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate. (I.R.C. § 2055(a)
  • Mortgages and Debt.
  • Administration expenses of the estate.
  • Losses during estate administration.

State estate and inheritance taxes

States with estate and inheritance taxes

Almost half of the states in the US impose estate and/or inheritance taxes. Among the states there is wide range in the asset levels subject to tax, and these levels are often subject to change. In general, if the estate asset value is higher than the exemption amount an estate tax return must be filed, even if allowable deductions reduce the estate value below the threshold exemption amount. Inheriting spousal beneficiaries (with the exclusion of a non-citizen spouse) and charitable beneficiaries are generally exempt from tax. [11]

Inheritance tax is not based on the estate's asset level, but is based on the beneficiaries' relationship to the deceased estate owner. Often spouses (and in some states same-sex partners) are not subject to the tax. Children beneficiaries are exempt in some states, and when subject to the tax, are usually taxed at low rates. The tax is usually imposed on sibling beneficiaries and other more distant familial beneficiaries, or upon unrelated beneficiaries. Charitable beneficiaries are exempt from the tax. Similar to the federal estate tax, state estate and inheritance tax returns generally must be filed nine months after the death of the estate owner. Note that both Maryland and New Jersey impose both estate and inheritance taxes. [12]

The states imposing estate and inheritance taxes are illustrated in the map to the right and are included in the table below. Because estate and inheritance taxes are subject to frequent change, a link to each state's most relevant estate tax webpage is provided. Also included are links to a summary of each state's estate and inheritance tax, courtesy of the Nolo legal site.

State Exemption Maximum tax rate Nolo link
Connecticut [1] $2 million 12% Connecticut estate tax
Delaware [2] $5.25 million 16% Delaware estate tax
District of Columbia [3] $1 million 16% District of Columbia estate tax
Hawaii [4] $4 million 16% Hawaii estate tax
Illinois [5] $2 million 16% Illinois estate tax
Indiana [6] $100 20% Indiana inheritance tax
Iowa [7] none 15% Iowa inheritance tax
Kentucky [8] $500 16% Kentucky inheritance tax
Maine [9] none 16% Maine estate tax
Maryland [10] $1 million
$150
16%
10%
Maryland estate tax
Maryland inheritance tax
Massachusetts [11] $1 million 16% Massachusetts estate tax
Minnesota [12] $1 million 41% Minnesota estate tax
Nebraska $10,000 18% Nebraska inheritance tax
New Jersey [13] $675,000
none
16%
16%
New Jersey estate tax
New Jersey inheritance tax
New York [14] $1 million 16% New York estate tax
North Carolina [15] Repealed - North Carolina estate tax
Ohio [16] Repealed - Ohio estate tax
Oregon [17] $1 million 16% Oregon estate tax
Pennsylvania [18] none 15% Pennsylvania inheritance tax
Rhode Island [19] $910,725 16% Rhode Island estate tax
Tennessee [20] $1.25 million 9.50% Tennessee estate tax
Vermont [21] $2.75 million 16% Vermont estate tax
Washington [22] $2 million 19% Washington estate tax

Notes

  1. The following nations (in addition to the U.S.) impose an estate or inheritance tax:
    Country Tax Informational links
    Belgium droits de succession or successierechten (Inheritance tax).
    Collected at the federal level but distributed to the regional level.
    Successions in Belgium
    Calcul des droits de succession
    Bermuda stamp duty Estate Stamp Duty
    Czech Republic daň dědická (Inheritance tax) Successions in the Czech Republic
    Finland perintövero (Finnish) or arvskatt (Swedish) (Inheritance tax) Successions in Finland
    France droits de succession (Inheritance tax) Successions in France
    Droits à la succession
    Germany Erbschaftssteuer (Inheritance tax) Successions in Germany
    Republic of Ireland Inheritance tax (Cáin Oidhreachta) Successions in Ireland
    Inheritance Tax
    Italy tassa di successione (Inheritance tax) Successions in Italy
    The Netherlands Successierecht (Inheritance tax) Successions in The Netherlands
    Norway arveavgift (inheritance and gift tax)
    Switzerland has no national inheritance tax. Some cantons impose estate taxes or inheritance taxes.
    United Kingdom Capital Transfer Tax (inheritance tax) Successions in United Kingdom
    HM Revenue & Customs: Inheritance Tax
  2. The Tentative tax breakdown for taxable estates for the years 2011 and 2012 is included in the following table (source: Federal Estate Tax, Montana State University):
    Taxable Gift or Estate Tentative tax Tax rate on excess
    from 0 to 10,000 0 18%
    from 10,000 to 20,000 1,800 20%
    from 20,000 to 40,000 3,800 22%
    from 40,000 to 60,000 8,200 24%
    from 60,000 to 80,000 13,000 26%
    from 80,000 to 100,000 18,200 28%
    from 100,000 to 150,000 23,800 30%
    from 150,000 to 250,000 38,800 32%
    from 250,000 to 500,000 70,800 34%
    500,000 155,000 35%
  3. Refer to the IRS for more information: Special Rules for Estates of Decedents Dying in 2010
  4. A non-citizen spouse can gain the benefits of the marital deduction by becoming a citizen of the United States. Estate values exceeding the personal exemption can also be left to a non-citizen spouse in a special type of trust, known as a Q-DOT ( "qualified domestic trust"). These trusts have special rules regarding beneficiary restrictions, estate tax obligations on distributions of trust principal, and are complex legal documents that must be created by an experienced estate lawyer. Estate Planning When You’re Married to a Noncitizen | Nolo.com, Retrieved 14 August 2012.

See also

References

  1. Estate Tax, IRS, Retrieved 13 August 2012.
  2. Definition, investopedia, Retrieved 12 August 2012.
  3. How to Calculate the Value of Your Gross Estate, retrieved 12 August 2012.
  4. Saving for College, FinAid.com
  5. IRS Form 709 - the U.S. Gift (and Generation-Skipping Transfer) Tax return.
  6. Section 529 Plans: Filing Tax Returns and Reporting Contributions, Margaret A. Munro.
  7. Estate Tax: Will Your Estate Have to Pay? | Nolo.com, Retrieved 14 August 2012.
  8. FAQs about the New Tax Rules for Executors
  9. Tax Provisions in The American Taxpayer Relief Act of 2012 (ATRA), from the Tax Policy Center (Urban Institute and Brookings Institution)
  10. IRS Frequently Asked Questions:What deductions are available to reduce the Estate Tax?, Retrieved 12 August 2012.
  11. State Estate Taxes: An Overview, Nolo.
  12. Inheritance Tax, Nolo