The estate tax in the United States is a tax imposed on the transfer of the "taxable estate" of a deceased person, whether such property is transferred via a Will, trust, or according to the state laws of intestacy. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, imposes a tax on transfers of property during a person's life; the gift tax prevents avoidance of the estate tax should a person want to give away his or her estate.
In addition to the federal government, many states also impose an estate tax, with the state version called either an estate tax or an inheritance tax.
Federal and state estate tax may be due on your estate if your gross estate is greater than the federal or state thresholds. The gross estate is the current market value of property you own including: cash and securities, real estate, trusts, insurance, annuities, retirement accounts and business interests. The estate tax due is calculated based on the taxable estate which is the gross estate minus specified deductions such as debts on estate property and property transferred to a surviving spouse or qualified charity.
On January 2, 2013, President Obama signed into law the American Taxpayer Relief Tax Act Of 2012. Here is a summary of what the new law provides for the estates of decedents who die in 2013 and beyond:
As of January 1, 2013, the federal estate tax law underwent a couple of important changes. The exemption was slated to return to $1,000,000 and the top tax rate was to revert to 55% at the beginning of 2013. Instead, Congress passed legislation such that the exemption will remain at $5,000,000 which is indexed for inflation (now $5,340,000 for 2014). The estate tax rate is 40%.
The federal gift and generation-skipping transfer taxes remain unified with the estate tax such that the gift tax exemption and generation-skipping transfer tax exemption will be $5.34 million each and the tax rate for both of these taxes will also be 40% in 2014.
The federal estate tax "portability" election, under which, if an election is made, the surviving spouse's exemption amount is increased by the deceased spouse's unused exemption amount, was made permanent by the act. The portability election eliminates the need for Credit Trust planning for federal estate taxes (however, see below for Washington state estate taxes) by allowing married couples to add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse's estate tax exemption. This will effectively allow married couples to pass $10.68 million to their heirs free from federal estate taxes with no specific estate planning. There are certain exceptions to this rule, however, and a need remains for rather sophisticated estate planning concerning State of Washington estate taxes, with additional other planning considerations to be considered. You should still consult with your estate planning attorney regarding your estate. All of the above changes have been made "permanent" up until the time Congress decides to change them again. At that time, clients will need to review their estate planning strategy to ensure that their plan reflects current law.
State of Washington Estate Taxes
On February 3, 2005, the Washington State Supreme Court invalidated the former estate tax imposed by the State of Washington. The Court held that any estate taxes paid should only be calculated under current federal law. As a result of the Court striking down the former estate tax scheme, the Washington State legislature enacted a new estate tax and Governor Gregoire signed the legislation into law on May 17, 2005. The State of Washington estate tax threshold amount for year 2013 is $2,000,000. A Washington State Estate Tax Return must be filed and estate tax may be due if the gross estate is greater than $2,000,000. The state estate tax threshold for 2014 is $2,012,000. Thus, it is important for those individuals or married couples whose estate is near $2.0 million or more to review their estate plan. Retirement accounts and life insurance death-benefit values are included when valuing a person's estate for estate tax purposes.
The amount of federal and state estate taxes owing will depend on the year of death, the value of one's estate, and the tax law in place at that time. Each person will be able to pass on $2.012 million on the state level and $5.34 million tax-free in 2014 on a federal level.
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