Estate Taxes
Death and taxes become inextricably entwined upon death. Known as “estate tax,” the postmortem fee to the government is sometimes erroneously called “death tax” because death is the event that triggers it. Depending on which state you live in, you may or may not face a state estate tax.
Everyone is subject to federal tax laws. Some tax relief is available through the Federal Estate Tax Applicable Credit Amount. For U.S. citizens, a specific amount of your estate is shielded from taxes under this law. For 2006, amounts exceeding these thresholds are subject to taxation with a sliding scale that can reach 46 percent.
The piece of an estate pie excluded from federal taxes gradually climbs to a high $3,500,000 in 2009. The year 2010 is the magic year for rich people to die. In that year, and that year only, there will be no estate tax. Beginning in 2011, the allowable amount for federal tax exclusion is reset at $1,000,000 unless changes are made to the tax laws by then.
The following chart, prepared by Prudential Financial, shows the amounts above the exclusions that would be subject to tax and the tax rates.
From |
To |
Tax on Col. 1 |
Tax Rate on Excess |
$0 |
$0 |
$0 |
18% |
10,000 |
20,000 |
1,800 |
20% |
20,000 |
40,000 |
3,800 |
22% |
40,000 |
60,000 |
8,200 |
24% |
60,000 |
80,000 |
13,000 |
26% |
80,000 |
100,000 |
18,200 |
28% |
100,000 |
150,000 |
23,800 |
30% |
150,000 |
250,000 |
38,800 |
32% |
250,000 |
500,000 |
70,800 |
34% |
500,000 |
750,000 |
155,800 |
37% |
750,000 |
1,000,000 |
248,300 |
39% |
1,000,000 |
1,250,000 |
345,800 |
41% |
1,250,000 |
1,500,000 |
448,300 |
43% |
1,500,000 |
2,000,000 |
555,800 |
45% |
2,000,000 |
+ |
780,800 |
46% |
Source: Unified Transfer Tax Rate Schedule, Internal Revenue Service
As the chart shows, estate taxes may dramatically shrink any assets that are not placed in a trust before being transferred to your heirs.
The following chart shows specifically how the exclusion amounts change until the year 2009 and going forward, when it resets to $1,000,000.
Year |
Exclusion Amount |
2004, 2005 |
$1,500,000 |
2006, 2007, 2008 |
$2,000,000 |
2009 |
$3,500,000 |
2010 |
not applicable |
2011 |
$1,000,000 |
It is not possible to completely eliminate estate taxes, but there are ways to reduce them:
Take the allowable exclusions.
Create trusts.
Use marital deductions in combination with trusts.
Donate to qualified charities.
Seek the professional counsel of a tax advisor as you incorporate federal estate tax rules in your own planning.
