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FAQ: Tax Law

What are Estate Taxes?

The federal estate tax is a tax on the transfer of property from an individual to his or her beneficiaries at the time of the individual’s death and on other transactions that are determined to be the equivalent of a transfer of property at death. It is sometimes called the death tax.

The estate tax is imposed on the decedent’s taxable estate. The taxable estate equals the total value of property transferred at death or considered to be transferred at death (called the gross estate) minus deductions allowed under the Internal Revenue Code. The following types of property are included in the gross estate:

  • Property that the decedent owned at the time of his or her death
  • Certain types of gifts made during the decedent’s lifetime within 3 years of death
  • Transfers of property in which the decedent retained a life estate
  • Transfers of property that take effect at death
  • Transfers that are revocable
  • Property that is jointly owned by another and the decedent at the time of his or her death
  • Qualified terminable interest property for which a marital deduction was allowed previously
  • Property that is subject to powers of appointment
  • The decedent’s life insurance
  • Pensions and annuities that have death benefits

Once it has been determined what property is included in the gross estate, the value of that property must be ascertained. The value is generally fair market value. For estate tax purposes, fair market value is defined as the price for which a willing buyer and seller would transfer property, where neither is forced to buy or to sell and both of them have reasonable knowledge of all the relevant facts. Fair market value is normally the value of the property on the date of death. The estate’s executor, however, can select a date other than the date of death to value the gross estate if certain conditions are met. This is called the alternate valuation date.

After finalizing the value of the property that is included in the gross estate, the allowable deductions must be determined. Deductions are available for the following:

  • Administration expenses
  • Funeral expenses
  • Claims against the estate
  • Unpaid mortgages
  • Theft or casualty losses sustained by the estate during administration if not covered by insurance
  • Charitable transfers
  • The marital deduction (the value of any property that passes from the decedent’s estate to the surviving spouse)
  • Any state or local estate or death taxes paid because of the decedent's death

To arrive at the taxable estate, subtract the available deductions from the value of the gross estate.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided for estate tax relief from January 1, 2002 through December 31, 2010. Under the Act, the estate tax was gradually reduced from a maximum estate tax rate of 55 percent for estates larger than $1 million in 2001, to 45 percent for estates larger than $3.5 million in 2009, to no estate tax in 2010. After December 31, 2010, the estate tax was scheduled to revert to its 2001 level — a maximum rate of 55 percent for estates larger than $1 million. However, on December 17, 2010, President Obama signed the 2010 Tax Relief Act, extending estate tax relief for another two years, from January 1, 2011 through December 31, 2012. Under the 2010 legislation, the maximum estate tax rate is 35 percent for estates larger than $5 million ($10 million for married couples). If Congress fails to enact legislation further extending estate tax relief, the estate tax will revert to its 2001 level on January 1, 2013.

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