Estate and Gift Tax FAQ
Most estates don't owe tax, but it pays to be informed. Here's a palatable introduction to estate and gift tax laws.
What's Below:
Will my estate have to pay taxes after I die?
What are the rates for federal estate taxes?
Are there ways to avoid federal estate taxes?
Can't I just give all my property away before I die and avoid estate taxes?
Will my estate have to pay taxes after I die?
It depends. The federal government imposes estate tax at your death only if your property is worth more than a certain amount, which depends on the year of death. But all property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. Estate tax is also not assessed on any property you leave to a tax-exempt charity.
| Year of Death | Exempt Amount |
| 2003 | $1 million |
| 2004 or 2005 | $1.5 million |
| 2006, 2007 or 2008 | $2 million |
| 2009 | $3.5 million |
| 2010 | No estate tax |
| 2011 | $1 million unless Congress extends repeal |
What are the rates for federal estate taxes?
Federal estate tax rates are steep, starting at 39%. The highest marginal rate, for the largest estates, is 48%. The maximum rate is scheduled to decline gradually to 45% in 2009. There will be no estate tax in 2010, if the current tax law is not amended.
Are there ways to avoid federal estate taxes?
Yes, although there are fewer ways than many people think, or hope, there are. Here are some of the most popular:
- Tax-free gifts. You can give up to $11,000 per calendar year per recipient without paying gift tax. You can also pay someone's tuition or medical bills, or give to a charity, without paying gift tax on the amount. This reduces the size of your estate and the eventual estate tax bill.
- An AB trust, where spouses leave their property in trust for their children, but give the surviving spouse the right to use it for life. This keeps the second spouse's taxable estate half the size it would be if the property were left entirely to the surviving spouse.
- A "QTIP" trust, which enables couples to postpone estate taxes until the second spouse dies.
- Charitable trusts, which involve making a sizable gift to a tax-exempt charity.
- Life insurance trusts, which let you take the value of life insurance proceeds out of your estate.
Can't I just give all my property away before I die and avoid estate taxes?
No. The government long anticipated this one. If you give away more than $11,000 per year to any one person or noncharitable institution, you are assessed federal "gift tax," which applies at the same rate as the estate tax.
Making gifts of $11,000 or less, however, can yield substantial estate tax savings if you keep at it for several years. Some other kinds of gifts are exempt from the gift/estate tax as well. You can give an unlimited amount of property to your spouse, unless your spouse is not a U.S. citizen, in which case you can give away up to $114,000 per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. And money spent directly for someone's medical bills or school tuition is exempt as well.
Do some states impose estate taxes?
Yes. Even if your estate isn't big enough to owe federal estate tax, the state may still take a bite.
Estate tax. Until recently, most states didn't impose their own estate tax; instead, they took a share of the federal estate tax paid by large estates. (This is called a "pick-up" or "sop" tax.) But the federal legislation that started the phase-out of the federal estate tax also cut the share of estate tax that states get to keep. To get back some of what they're losing, some states are collecting tax from estates that aren't big enough to owe any federal tax. So far, almost half the states have changed their laws so they can keep collecting estate tax.
For example, in New Jersey, Rhode Island, and Wisconsin, estates worth more than $675,000 may owe state estate tax.. Property left to a surviving spouse, however, is exempt from state estate tax, just as it is exempt from federal estate tax.
Inheritance tax. Some other states impose a separate tax on a deceased person's property, called an inheritance tax. The tax rate depends on who inherits the property; usually, spouses and other close relatives pay nothing or a low rate.
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Can I avoid paying state estate or inheritance taxes?
If your state imposes estate or inheritance taxes, there probably isn't much you can do. But if you live in two states -- winter here, summer there -- your inheritors may save money if you can make your legal residence in a state that doesn't impose these taxes.