“Estate tax” is a tax levied, at the time of your death, on the total value of your possessions. Affectionately referred to as a death tax, the estate tax was enacted as a way to redistribute wealth and avoid the undesirable concentration of excessive wealth within a few families.
In 2008, “excessive wealth” starts at $2.0 million. So if the value of your taxable estate (gross estate minus certain deductions) is under $2.0 million and you die in 2008, there will be no federal estate tax due on your estate. In 2009 the threshold is raised to $3.5 million. In 2010, it drops to $0 (yes, that’s right, under current tax law every single dollar of value in your estate will be taxed. That is, in 2010 there is no estate tax exemption amount at all). In 2011 and beyond, then, the exemption amount returns to $1,000,000. Truth is once again stranger than fiction. Congress is expected to re-visit current law in the coming years.
How much is the estate tax?
The IRS levies, upon your death, an estate tax on every dollar in value that your estate exceeds (at the time of your death) the exemption threshold in place for the year of your death ($2.0 million in 2008). Currently, the estate rate begins at 18 percent. The tax percentage (rate) increases steadily as the value of your estate rises beyond the exemption threshold until it hits 45 percent at the $2 million mark. In other words, once the value of the taxable portion of your estate hits $2 million (for 2008 that’s a total estate value of $4.0 million), the tax rate becomes 45 percent. For every additional dollar in value, you’ll have to give 45 cents to the federal government.
Following with the above example, a $4.0 million estate in 2008 (with $2 million over the exemption threshold) would owe a total tax bill of $900,000. The effective tax rate would be 22.5 percent.
In addition to federal estate tax, there can also be a state estate tax. Check with your local advisor for details.
Unlimited Marital Deduction
Under federal tax law and most state tax laws, spouses can make gifts to each other during their life or at death with no tax liability. So, if you wish, all of your assets may pass to your surviving spouse, upon your death, completely free of estate taxes.
Who Can Help You With Your Estate Planning?
The field of estate planning is complex. There are professionals that specialize in assisting business owners and wealthy individuals in estate planning. It is best to use both an experienced tax attorney and a knowledgeable financial planner.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
This publication is intended to provide general information on the subject matters covered. It is sold and distributed with the understanding that neither the publisher nor any distributor or advertiser is engaged in providing legal, tax, insurance, investment or other professional advice. The advice of a qualified professional should be sought before any reader applies a concept presented herein to his or her particular situation or business.
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