Estate and inheritance tax

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." In addition to federal taxation, some states also impose an estate tax or an inheritance tax on property transfers at death.

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.

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

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. 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 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.

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.

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

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	0%
2011	$5 million	35%
2012	$5.12 million	35%
2013	$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:

• 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).
• 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.

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.

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]	$3.5 million	16%	Delaware estate tax
District of Columbia [3]	$1 million	16%	District of Columbia estate tax
Hawaii [4]	$3.5 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]	$5 million	16%	North Carolina inheritance tax
Ohio [16]	$338,333	7%	Ohio estate tax
Oregon [17]	$1 million	16%	Oregon estate tax
Pennsylvania [18]	none	15%	Pennsylvania inheritance tax
Rhode Island [19]	$859,350	16%	Rhode Island inheritance tax
Tennessee [20]	$1 million	9.50%	Tennessee estate tax
Vermont [21]	$2.75 million	16%	Vermont estate tax
Washington [22]	$2 million	19%	Washington estate tax

See also

• Probate

References

 

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