American Estate Planning Attorney Directory

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Federal Estate Taxes

WHAT IS THE FEDERAL ESTATE TAX? It is a tax on any transfer of assets from a deceased person's estate to his or her heirs.

HASN'T THE ESTATE TAX BEEN REPEALED? In 2001, the United States Congress passed a tax and budget bill that would gradually phase out the estate tax by the year 2010.  But without approval by 60% of the Senate, any new tax law expires in 10 years.  On June 12, 2002, the Senate failed to achieve the 60% vote needed to make the repeal permanent, so under current law the estate tax will be back in full force in 2011.  However, a lot can happen between now and 2011, including further changes to the tax laws.

WHAT ASSETS ARE TAXED? All of the assets owned by the deceased person are subject to the tax, including property in joint tenancy, living trusts, and life insurance (if the insurance was owned or controlled by the decedent).

WHAT IS THE EXCLUSION AMOUNT? Each estate has an exclusion from the tax that will increase each year until 2010, when it will be phased out. The exclusion amounts are as follows:

WHAT IS THE MARITAL DEDUCTION? Assets that are transferred from one spouse to the other spouse at death are not taxed. This is called the "marital deduction," and there is no limit on how much can be transferred.

WHAT ARE THE DISADVANTAGES OF USING THE MARITAL DEDUCTION? Although the marital deduction protects the surviving spouse from federal estate taxes, it may subject the surviving spouse's estate to higher taxes at a later date. Using the marital deduction to transfer all of a spouse's assets to the surviving spouse means that the first spouse to die will not have taken advantage of his or her exclusion amount, and that benefit is no longer available to the couple's estate.

WHAT IS THE FEDERAL GIFT TAX? The gift tax is intended to limit the amount that can be transferred to persons other than a spouse without incurring a tax. Gifts of up to $10,000 can be made during a year to an individual without incurring a gift tax. If the gift is made by a married couple from their jointly owned assets, it can be as much as $20,000 without being taxed. If gifts larger than those amounts are made, a gift tax return must be filed.

The amount that can be transferred free of gift taxes was indexed to inflation, starting in 1999. However, Congress has provided that the $10,000 amount will be raised only after inflation has increased the amount to $11,000, and by $1,000 increments after that.

WHAT IS A DISCLAIMER? A disclaimer is a refusal to inherit all or part of an asset. The reason for doing this is that the person who is entitled to receive a bequest either doesn't need or doesn't want the bequest. In most cases the bequest would only make a sizable estate larger and increase the amount of federal estate taxes that will eventually be collected from that estate. The disclaimer operates as though the disclaimant died before the decedent, and the decedent's estate plan specifies a contingent beneficiary, who is often the disclaimant's children. If that is the case, the effect is that the bequest goes to the disclaimant's children, and is never taxed in the disclaimant's estate.

As an example, assume that the disclaimant has a $5 million estate and receives a $1 million bequest from his or her parents' estate. If the parents' estate plan provides that the bequest will go to the disclaimant's children if he or she does not survive the parents, the disclaimer will allow the $1 million bequest to go directly to the disclaimant's children. If a disclaimer is not used in this situation, the $1 million would stay in the disclaimant's estate, and eventually be taxed at 50 percent. The disclaimant's children would receive only $500,000 if the disclaimer is not used, but $1 million if it is used.

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AEPAD is the American Estate Planning Attorney Directory.  While the information on this site deals with legal issues, it does not constitute legal advice. If you have specific questions related to information available on this site, you are strongly encouraged to consult an attorney who can investigate the circumstances of your situation and the particulars in your state.