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Federal Estate and Gift Taxes

For most U.S. citizens the federal estate tax is meaningless because most citizens don't have a net worth of more than $5.12 million.  But that situation can change quickly if Congress fails to take action on estate taxes during 2012.  This web page explains the estate tax and how it may affect your estate.

THE FEDERAL ESTATE TAX is a tax on any transfer of assets from a deceased person's estate to his or her heirs, except for transfers to spouses.

ALL OF THE ASSETS owned by the deceased person are subject to the estate tax, including property in joint tenancy, living trusts, IRAs, and life insurance (if the insurance was owned or controlled by the decedent).

EACH ESTATE HAS AN EXCLUSION from the tax of 5.12 million per person.  That amount is indexed to inflation and will go up in multiples of $10,000 at the end of each year if inflation has occurred.  For 2011, the exclusion amount was $5 million. 

TAX RATE:  Assets that are subject to the estate tax (in other words, an estate greater than $5.12 million for a single person and $10.24 million for a married couple) are taxed at 35 percent.

TAX BILL EXPIRATION DATE:  The law (H.R. 4853) signed by the President on December 17, 2010, has an expiration date of December 31, 2012.  If Congress does not take action before that date to continue the provisions of the tax bill, it will expire and the exemption for the estate tax will be reduced to $1 million per person. 

THE MARITAL DEDUCTION: Assets that are transferred from one spouse to the other spouse at death are not taxed. This is called the "marital deduction," and there is no limit on how much can be transferred.

PORTABILITY:  If a spouse does not use his or her exclusion amount by funding an exemption trust or making bequests to anyone other than his or her spouse, the surviving spouse can use the unused exclusion amount of the first spouse to die.  Portability doubles the amount available to the surviving spouse in many cases, and up to $10 million of assets can be excluded from the estate tax.  Also, see the portability page.

Here are the requirements for portability:
1.  The decedent and the survivor must have been married.
2.  Death must have occurred after Dec. 31, 2010.
3.  An election to use portability must be made on the estate tax return of the decedent.
4.  Portability applies only to the surviving spouse, not to other family members.
4.  Portability applies for both estate and gift tax purposes.
5.  Portability does not apply to the generation skipping tax.
6.  Under current law, portability ends when the tax bill sunsets on Dec. 31, 2012.

THE FEDERAL GIFT TAX is intended to limit the amount that can be transferred to persons other than a spouse without incurring a tax. Annual gifts of up to $13,000 can be made to an individual without incurring a gift tax. If the gift is made by a married couple from their jointly owned assets, it can be as much as $26,000 per year without being taxed. There is a lifetime gift exemption of $5.12 million per donor, but the gifts made during lifetime will be deducted from the donor's exclusion amount.  The lifetime gift exemption will return to $1 million in 2013 if Congress does not extend current tax law.

WHAT IS A DISCLAIMER? A disclaimer is a refusal to inherit all or part of an asset or of an entire estate. The reason for doing this is that the person who is entitled to receive a bequest either doesn't need or doesn't want the bequest. In most cases the bequest would only make a sizable estate larger and increase the amount of federal estate taxes that will eventually be collected from that estate. The disclaimer operates as though the disclaimant died before the decedent, and the decedent's estate plan specifies a contingent beneficiary, who is often the disclaimant's children. If that is the case, the effect is that the bequest goes to the disclaimant's children, and is never taxed in the disclaimant's estate.   In some cases, the amount that is disclaimed will go to a disclaimer trust.