Figuring out how much federal estate tax is owed after someone's death can be complicated. Under current law, only very large estates owe tax; if an estate's value is less than $5 million, no tax will be owed. Fewer than one percent of all estates owe federal estate tax.
What Is Included in an Estate?
Estate tax is based on the value of the entire estate—that is, all property left by someone who has died. Estate assets include:
- real estate
- cars, boats, RV’s
- bank accounts, cash, stocks, bonds
- retirement accounts (IRAs & 401k’s)
- life insurance proceeds
- furniture, antiques, jewelry, artwork
- anything else of monetary value
A lot of property, however, is not counted. Property is not counted, for federal estate tax purposes, if it’s left to:
- a surviving spouse (as long as he or she is a U.S. citizen and the marriage is recognized by the federal government—in other words, married same-sex couples don’t get this benefit ), or
- a tax-exempt charity.
Calculating Estate Tax
For deaths in 2011 and 2012, tax is owed on the amount of property in the estate that exceeds $5 million. The tax rate is 35%.
Special Tax Breaks for Married Couples
For deaths in 2011 and 2012, surviving spouses get a big tax break, known as “portability.” The survivor can make use of the deceased spouse’s tax exemption, if it wasn’t all used at the first spouse’s death. The result is that married couples get a total $10 million exemption from federal estate tax. (Like other federal benefits, this one extends only to marriages recognized by the federal government. That means that same-sex couples who are legally married in one of the states that allows it are not treated like other married couples and do not get this tax advantage.)
Here’s how it works. Say a man dies and leaves property worth $3 million to his wife. No estate tax is due, because property left to s surviving spouse isn’t subject to the federal estate tax. When the wife dies, she owns $6 million worth of property—the $3 million she inherited from her husband and her own half of the couple’s assets, also worth $3 million. Although she leaves more than $5 million, her estate won’t be taxes, because she can use $1 million of her late husband’s exemption. He didn’t use any of his exemption, so she could actually leave up to $10 million without owing any estate tax.
Learn more about the portability provision for married couples.
Legal Help With Reducing Estate Tax
If you are wealthy enough to be concerned about federal estate tax, it is important to contact an experienced estate tax planning attorney. A skilled lawyer can explain strategies to minimize estate tax at your death, preserving as much of your estate as possible for your family. For example, you might want to create a bypass trust with your spouse, or hold a life insurance policy in an irrevocable life insurance trust.
If you are wrapping up the estate of someone who has died, and you think the estate may owe federal estate tax, by all means contact an attorney. Preparing a federal estate tax return (IRS Form 706) is not a do-it-yourself job.
