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Federal Estate Tax
The federal estate
tax applies to the transfer of property owned or controlled by the decedent at
death, including insurance policies on the decedentâs life that the decedent
owned or controlled. The taxable estate is determined by deducting from the "gross
estate" the deductions provided for in the Internal Revenue Code for expenses,
debts, taxes, losses, charitable bequests, and marital bequests.
There are two major
exclusions from the federal estate tax. The federal government exempts transfers
between spouses, making 100% of assets left to a surviving spouse, whether through
a will (probate assets) or by law (non-probate assets), deductible. This is called
the marital deduction. Also, every individual has available an exemption
from the federal estate tax. Following tax legislation passed by Congress in 2001,
from 2002 through 2009 the estate tax rates and exemption amounts are as shown
below:
| Calendar Year |
Estate Tax Exemption |
Highest Estate Tax Rate |
| 2002
2003
2004
2005
2006
2007
2008
2009
2010
|
$1 million
$1 million
$1.5 million
$1.5 million
$2 million
$2 million
$2 million
$3.5 million
N/A (tax repealed)
|
50%
49%
48%
47%
46%
45%
45%
45%
N/A
|
After 2009 the estate
tax is repealed. However, the 2001 legislation includes a sunset provision under
which all the provisions of the 2001 legislation will be repealed beginning after
December 31, 2001 unless they are affirmatively re-enacted by Congress. This would
return the estate tax to what it would have been if the 2001 legislation had never
been passed ($1 million exemption, maximum rate of 55%), and makes the future
of the estate tax uncertain, and planning somewhat difficult.
If your will provides
that all property is to pass to a surviving spouse, and you are the first to die,
your estate will owe no federal estate tax because of the unlimited marital deduction
for property passing to your surviving spouse.
However, an estate
tax may be incurred when your surviving spouse dies. Upon the death of your surviving
spouse, the unlimited marital deduction for assets passing to a surviving spouse
is not available. Therefore, in the estate of the second to die, that estate will
only have the exemption available as stated above, and the balance of the estate
will be taxed at rates ranging from 37% to the maximum stated above.
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