Federal Estate Tax
What are "Federal estate taxes"?
The Federal estate tax is the transfer tax imposed upon an estate in excess of the threshold amount, which is now 2 million dollars, in a decedent's estate at death. That is a very simplistic description of what it is, because it involves a great deal more in terms of exemptions, deductions, add-ons, et cetera. But it is a transfer tax, at death, on a decedent's property.
What are "inheritance taxes"?
Inheritance taxes are taxes assesed by a taxing agency against that which an individual beneficiary receives. The taxes are a function of the value of what that beneficiary receives and generally is chargeable to that beneficiary. Estate taxes, by contrast, are chargeable to the estate as a whole. The calculation is one made against the entire estate; you go up the tax brackets only once in order to determine what the tax in the estate is. Whereas with an inheritance tax, for each beneficiary there's a tax calculation which goes up the bracket seperately. California does not have an inheritance tax at the moment.
How is the Federal estate tax determined?
The federal estate tax is determined based upon the value of the estate, the net value of the estate, after deductions are applied and after application of the exemption equivalent, which is now $2 million.
Who is exempt from Federal estate taxes?
The estate of any decedent that does not exceed two million dollars is automatically exempt from estate tax. In addition, if an estate passes to a surviving spouse or to a charity, that estate also is totally exempt from estate tax. As a general matter, estate planners attempt to use both the two million dollar exempt amount, plus the marital deduction when they're planning for a married couple, to minimize the estate tax on the death of the second spouse. This is done by carving out the two million dollar exempt portion, putting it into a separate trust, and then giving the balance of the estate, whatever it is, to the surviving spouse in a manner wherein it qualifies for the marital deduction. What happens then is that there is no tax at the death of the first spouse, and at the death of the second spouse, the two million portion that was carved out is not taxed at the spouse's estate. So, the surviving spouse will only be taxed on his or her share of the estate after the two million dollar exempt amount. Using that approach, you can view the two estates as one, and minimize the amount of the estate tax on both deaths.
How can I legally reduce the potential taxes on my estate?
A client with an estate with a potential federal estate tax exposure can reduce the potential taxes on his estate by two means. One is during lifetime, by making gifts to third parties. Completed gifts to third parties will remove from the estate future appreciation and so reduce potential taxes. The other way to minimize or avoid estate taxation is by use of the marital and charitable donations. The normal exemption right now is $2 milllion. If the amount in excess of that $2 million, instead of being taxable, it goes to a charity or to a surviving spouse. In this case there will be no estate tax, to the extent that that deductible amount represents the entire amount over the $2 milion.
