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. The following nations (in addition to the U.S.) impose an estate or inheritance tax:

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.

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.

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.

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
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.