What are Estate Taxes?
Estate taxes are different from, and in addition to, probate expenses and final income taxes (which must be paid on income you receive in the year you die). Some states also have their own death/inheritance taxes. Federal estate taxes are expensive – in 2003 they start at 41% and quickly go up to 49%. And they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated – if you plan ahead.
According to the IRS, estate taxes are assessed on property that is transferred when someone passes away. When you die, the Gross Estate is computed by the executor of your will and includes all real estate, cash, assets, personal property and other possessions that will be given to others individuals or entities. Fortunately, however, estate taxes only apply to the wealthiest of Americans because a unified tax credit is given to estates that are valued at less than $1 million. So if your estate is worth less than that, your beneficiaries don’t have to worry about filing an estate tax return. This can relieve a significant burden for both beneficiaries and executors. What are gift taxes? Gift taxes are assessed on property that is given freely from one individual or another. For example, if your father decides he wants to give you his car because he doesn’t need it anymore, you will still have to pay gift taxes on the receipt of the vehicle. You should also know that gift taxes apply w
Estate taxes are taxes based on the value of the estate you leave when you die. Estates valued at more than $675,000 for 2001 are subject to the federal estate tax. Some states use lower limits, but other states charge no estate taxes at all. Any estate taxes that are due are usually paid by the estate itself. This sets them apart from inheritance taxes, which are state taxes that your heirs may be required to pay on the property they inherit. Note that the recently enacted Economic and Tax Relief Reconciliation Act of 2001 will ultimately repeal the estate tax in 2010 and diminish its effect each year until then. Consult IRS Publication 950, Introduction to Estate and Gift Taxes, for more information. You can download it from the IRS Web site or order by calling 1-800-TAX-FORM (829-3676).
The Estate Tax is a Federal Transfer Tax. Congress allows each of us to pass a certain amount of assets tax-free during our lifetime. This is known as the lifetime exemption. Currently, each individual can pass $1,000,000 tax-free in the form of lifetime gifts or at death. Any amount transferred in excess of this amount is subject to either a Gift or Estate Tax. This exemption will increase for Estate Taxes (but not for Gift Taxes) to $1,500,000 in 2004 and 2005, $2,000,000 in 2006-2008, $3,500,000 in 2009, and is repealed in 2010, when the Estate Tax is abolished. In 2011, Congress can reinstate the Estate Tax. The Gift Tax rates for will gradually be reduced until it reaches 34% in 2010. Each individual can give away $11,000 annually to anyone, without having the gift reduce the lifetime exemption. In 2002, the Estate Tax rate starts at 41% and increases to a peak of 50%.
