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.

IRS Publication 559, Survivors, Executors, and Administrators is designed to help those in charge (personal representatives) of the property (estate) of an individual who has died (decedent). It shows them how to complete and file federal income tax returns and explains their responsibility to pay any taxes due on behalf of the decedent.


What is an estate?

An estate is a legal entity created as the result of a person’s death. The decedent’s estate is a separate legal entity for federal tax purposes.[2]

An estate consists of real and/or personal property of the deceased person. The estate pays any debts owed by the decedent and then distributes the balance of the estate’s assets to the beneficiaries of the estate.

The estate exists until the final distribution of the assets is made to the heirs and other beneficiaries.

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. [3]

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 [4]
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 $14,000 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. [5] If married, you and your spouse can "split gifts" and give $28,000 per recipient, and $140,000 for spreading the gift over five years. If you select the five year program you must elect it by filing IRS Form 790 [6] 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. [7]

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 2014, the exclusion amount totals $5.34 million dollars per person.[8]

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. [9]

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[10] $5 million 35%
2012 $5.12 million 35%
2013 $5.25 million 40%
2014 $5.34 million 40%
2015 $5.43million 40%

The taxable estate

If the gross estate is subject to estate tax, the following deductions are allowable for determining the taxable estate: [11]

  • 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.

When to file

You must file Form 706 to report estate and/or Generation-Skipping Transfer (GST) tax within 9 months after the date of the decedent's death.[12]

State estate and inheritance taxes

The federal estate tax applies only to very large estates (above $5.43 million in 2015). But many estates that don’t owe federal tax do owe a separate state estate tax. It depends on where the deceased person lived and owned property.[13]

The estate tax gets a lot more attention, but people who inherit property may also have to pay a separate inheritance tax, which is imposed by six states. If you inherit property from someone who lived in one of these states, you may end up paying some of your inheritance in taxes.[14]

Inheritance tax is a state tax only; the federal government does not have an inheritance tax. Inheritance tax is imposed in addition to the federal estate tax and any state estate tax.[14]

Whether or not you will owe inheritance tax depends on how closely related you were to the person who left you money. It doesn’t matter, in most states, how big the whole estate is or how much you inherit. You might owe state inheritance tax even if you inherit a small amount of property.[14]

If you inherit from your spouse (or registered domestic partner or civil union partner), you are exempt from inheritance tax in all states. Charitable beneficiaries may also be exempt from the tax. Depending on state law, children who inherit either pay nothing or pay low rates. [14]

States with estate and inheritance taxes

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 website is provided. Also included are links to a summary of each state's estate and inheritance tax, courtesy of the Nolo legal site.


Imbox notice.png A comprehensive summary of state death taxes can be found at State Death Tax Chart, maintained by McGuireWoods LLP
State [tax website] 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] Repealed 20% Indiana inheritance tax (repealed)
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] Note 1 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
Note 1: New York enacted legislation on March 31, 2014 that increases the New York exempt amount (which had been $1 million) as follows:[15]
4/1/14 - 3/31/15 -- $2,062,500
4/1/15 - 3/31/16 -- $3,125,000
4/1/16 - 3/31/17 -- $4,187,500
4/1/17 - 12/31/18 -- $5,250,000
effective 1/1/19 -- same as Federal

When to file

Check with the relevant state, but they generally require a return filed within nine months from the date of death.

Also check for a tax discount. For example, Pennsylvania offers a 5% discount if taxes are paid within 3 months of the decedent's death.[16]

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. Publication 1635 - Understanding Your EIN (Employer Identification Number), from the IRS.
  3. Definition, investopedia, Retrieved 12 August 2012.
  4. How to Calculate the Value of Your Gross Estate, retrieved 12 August 2012.
  5. Saving for College, FinAid.com
  6. IRS Form 709 - the U.S. Gift (and Generation-Skipping Transfer) Tax return.
  7. Section 529 Plans: Filing Tax Returns and Reporting Contributions, Margaret A. Munro.
  8. Estate Tax, from the IRS
  9. Estate Tax: Will Your Estate Have to Pay? | Nolo.com, Retrieved 14 August 2012.
  10. FAQs about the New Tax Rules for Executors
  11. IRS Frequently Asked Questions:What deductions are available to reduce the Estate Tax?, Retrieved 12 August 2012.
  12. Instructions for Form 706 (08/2013), from the IRS.
  13. State Estate Taxes, from nolo.com
  14. 14.0 14.1 14.2 14.3 Inheritance Tax, from nolo.com
  15. State Death Tax Chart, by McGuireWoods LLP.
  16. Inheritance Tax, PA Department of Revenue