Death and Taxes
1. What are the general legal principles of the federal estate tax?
Your estate isn’t liable for federal estate taxation unless it exceeds the available exemption amount. This is the value of assets that each person may pass on to beneficiaries without paying federal estate tax. The Economic Growth and Tax Relief Act of 2001 provides for a gradual increase in the exemption. In the year of 2009, the exemption if $3.5 million. In addition, you can pass your entire estate, without any estate taxes, to your spouse. This is referred to as the unlimited marital deduction. If you simply leave your estate to your spouse and don’t create an appropriate trust to take advantage of your $3.5 million exemption, your spouse’s estate will pay taxes on this sum when he or she dies.
To decide what the property in your estate is worth, the IRS does not look at what you paid for it, but generally uses the fair market value of property you own at your death. For appraisal purposes, the government uses the face value of insurance policies in your name, including most group policies from work or professional organizations, but only cash value on someone else’s life if you die before it has matured.
To the extent your estate exceeds the available exemption, the federal estate tax rates start at 37 percent. The assets subject to tax at death may include the family home, the family farm, life insurance, household furnishings, benefits under employee benefit plans, and other items that produce no lifetime income. In short, you may be richer than you think. If your estate is likely to exceed the threshold, then good estate planning can sharply reduce the amount of money that goes to the government instead of to your beneficiaries. Although the federal estate tax misses most people, it is a very onerous tax. The federal estate tax is at 37% and may be as high as 50%. Therefore, if you are in jeopardy of exceeding the threshold, then you should be certain to perform an asset inventory, and then see your lawyer if you need tax planning.
