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For tax purposes, your “estate”
generally includes the value of all
your property in which you had an
interest at the time of your death
minus any debts or obligations you owe.
United States citizens may be subject
to federal estate tax, which is a
tax on the transfer of your property
at your death. The tax is assessed
against the entire estate (which
generally includes, among other things,
life insurance death benefits if
you retain “incidents of ownership”)
minus certain exclusions and
deductions. The estate tax is
generally paid from the estate’s assets.
State, rather than federal law
usually governs the actual transfer
of property to heirs. Verify
applicable state laws for additional
estate, inheritance or death taxes
that may be imposed on your property.
Research the state laws where you
have property located, as well as
where you maintain your legal residence.
Generally, only after the estate has
paid all debts and taxes can the property
be distributed.
The amount of federal estate
taxes incurred by your estate upon
your death depends on:
- The size of your estate.
- The year in which you die.
- The individual who inherits your estate.
The Unified Estate and Gift tax
applicable exclusion amount allows each
individual to give assets away, in
specified amounts tax-free, during
their lifetime and/or at death.
The Economic Growth and Tax Relief
Reconciliation Act of 2001 raises
the estate tax applicable exclusion
amount from $2.0 million for 2007
and 2008 to $3.5 million for 2009.
The gift tax applicable exclusion amount
for 2007 is $1.0 million. Gifts made
to tax-exempt charitable organizations
are also free from federal estate taxes.
You may gift an unlimited amount of
property to your spouse (as long as he
is a U.S. citizen) without incurring
gift taxes. Additionally, you may leave
your entire estate to your spouse without
being subject to estate tax. This provision
is referred to as the marital deduction.
However, it may not be prudent to transfer
your entire estate to your spouse if your
estate is valued at more than the current
maximum allowable exclusion. By so doing,
you may create a substantial tax burden on
the estate of your spouse. It may be wiser
to create a trust for your surviving spouse
in order to avoid significant taxation upon
your spouse’s death. In addition, if your
spouse is not a U.S. citizen, a different
and rather complex set of rules applies to
property transfer. It is important to consult
a professional in this area of the
law — especially if you have an estate valued
at more than the current maximum exclusion amount.
Note: The majority of estates will pass to
heirs free of federal estate taxes.
This means that the primary focus of
estate planning for most individuals
will be how to leave personal property
as you desire under the governing state laws.
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Basic Money Management
Basic Money Management
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