Estate Tax

UPDATE (January 2013): As part of the "Fiscal Cliff" deal, Congress voted on January 1, 2013 to make permanent most of the current rules relating to the estate tax.  Under the new law (signed by President Obama), U.S. estate tax law will provide a $5 million, indexed for inflation (so $5.25 million in 2013) per-person exemption ($10.5 million per married couple). The deal raises the highest estate tax rate from 35 to 40 percent.

UPDATE (December 17, 2010): Alright folks, I figured I better update this page. Last night the House of Representatives approved the tax bill the Senate had already approved. It goes to the White House for signature today. Basically, the "Bush" income tax rates have been extended two more years. But, also, buried in the bill are New Estate Tax Rules. The new rules raise the estate tax exemption to $5 Million [with the ability for married couples to end up with a $10 million exemption] and set the rate on estates above that at an historically low 35%.

This is all effective back to 1 January 2010 but if someone died between 1 January 2010 and 17 December 2010 their estate will use the "old" 2010 rules unless they elect the "new" ones.

So, very good news on the estate tax front. At least, if you don't like estate taxes.

Note that the rest of this page is based on the old law, so it's not exactly applicable any longer. HOWEVER, the fact remains that the current law will now expire on December 31, 2012 unless Congress acts before then. So, on January 1, 2013 we will be back to exactly where we were, in which case the discussion below will apply again. So, read it and consider the potential ramifications to you.


Will my estate have to pay estate taxes when I die?

Answer: "It's hard to say."


"Because the law is in a state of flux."

Currently, an estate is exempt from estate tax up to $2,000,000.

As the law now stands, in 2009, the exemption amount will go up to $3,500,000. In 2010, there will be no estate tax at all.


JANUARY 2010 UPDATE: Actually, there is no update. Surprisingly Congress failed to act last year. So, the estate tax (but not the gift tax) is gone (at this point) for this year.

Will Congress act in 2010? Probably, maybe?? Could they pass a bill that enacts a retroactive estate tax going back to January 1, 2020. Maybe. Would it be challenged in court? Certainly. What would be the outcome? Hard to say.

As you can see, it's a mess right now as things are still very much up in the air. But, for now, officially, there is no estate tax -- this year. And, for now, the provisions of the 2001 Tax Act (estate tax cut) will no longer be effective on January 1, 2011 and so the tax rules that existed in 2001 will take effect again; therefore, (as of now) in 2011, federal estate tax will be assessed on property in excess of $1 million with a maximum tax rate of 55%.) So, if this stands as is, LOT's more people will be affected by the estate tax. More to come....


So for tax planning purposes, 2010 is the optimal year to die!!

estate tax

But, alas, in 2011, the estate tax exemption amount is scheduled to go back to $1,000,000.

There have been unsuccessful attempts to amend the current law in various ways. And, it is beyond my ability to predict what will happen in the future to estate taxation. So, all we have to go on presently is the current law.

Given that state of affairs, perhaps the most reasonable course is to assume your estate will be exempt up to $1,000,000 and anything above that will be subject to a (rather draconian) estate tax rate of 50%.

And that is just the federal estate tax. You may also have a state estate or death tax and possibly even an additional "generation-skipping tax."

So, a threshold question to ask yourself is whether you will have assets worth $1,000,000 or more at death. To find out what assets are included in estate read Assets Subject to Estate Tax.

If so, you should give serious thought to how you could arrange your affairs in order to ensure the smallest estate tax bite possible.

Can a living trust be used to save estate taxes?

A living trust (credit shelter trust version) is one vehicle that can be used to limit the tax your estate might have to pay. There are other ways as well. To find out more, read Credit Shelter Trust.

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