Federal Estate Tax

The Federal Estate Tax

The federal estate tax is an excise tax on the right to transfer property at date of death. The gross estate includes the fair market value of all assets owned by the decedent as of the date of death, including life insurance policies. The top estate tax bracket is 55% on estates over $3,000,000. Also, on estates over $10,000,000, there is a 5% surcharge. This 5% surcharge recaptures the benefits of the lower graduated tax brackets. Above $17,184,000, the tax again becomes a flat 55% of the net taxable estate.

The tax applies only to taxable estates which exceed the applicable exclusion amount. For 2000, the applicable exclusion amount is $675,000.1

Transfers between spouses generally qualify for the unlimited marital deduction and are free of current tax. IRC See. 2056

The estate tax return (Form 706) and any taxes due are generally payable nine months after date of death. In some situations, a portion of the taxes may be paid to the IRS in installments. IRC Secs. 6161 and 6166

If the value of the estate assets declines during the first six months after death (which often happens if the decedent owned a business), the value (for all assets) as of six months after death may be used on the tax return.

Lifetime gifts which exceed the annual exclusion ($ 10,000 per donee per year) Will also reduce the estate owner's unified credit.

Some transfers made during one's lifetime may be brought back into the decedent's
estate. A few examples would include:

•   Transfer of life insurance policies within three years prior to death. IRC Sec. 2035
•   Transfer of an asset from which the donor retains an income for his or her life. IRC Sec.2036
•   Transfer of an asset where donor retains the right to alter or terminate the transfer. IRC Sec. 2038
•   Assets placed in joint tenancy with another are included in the gross estate.

Under current law, the applicable exclusion amount is scheduled to change as follows: $675,000 in 2000 and 2001; $700,000 in 2002 and 2003; $850,000 in 2004; $950,000 in 2005; and $1,000,000 in 2006 and later years. 2 The annual exclusion is indexed for inflation for years after 1998.