What is the Federal Estate Tax?

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At the end of 2010, Congress passed the ‘‘Tax Relief, Unemployment Insurance Preauthorization, and Job Creation Act of 2010.” Special provisions apply to those who died in 2010. In 2011 and 2012, there was an exemption amount from federal estate tax of $5 million and $5.12 million per person respectively, and a 35% top tax rate.

If Congress had not acted, the exemption amount for federal estate tax was scheduled to return on January 1, 2013 to $1 million exemption amount and a 55% top tax rate. Congress did act, however, and the new tax law maintained the amount you could pass tax-free.

At death, the estate tax applies to the transfer of property to another person. The personal representative (executor or Trustee) is required to take an inventory of all property owned by the decedent at death to determine the gross estate before any deductions, exclusions or credits. The executor must determine the fair market value of all properties, which means an independent qualified appraiser for certain assets, may be required.

The date of valuation for assets may be the date the decedent died or an alternate valuation date (six months after the date of the decedents’ death). After the gross estate value has been determined, funeral, administration expenses, marital/charitable deductions, state death tax deductions are subtracted to determine the Taxable estate. The tax is due and payable within 9 months after death.

Also, depending on the state in which the decedent resides, the state inheritance tax may take up to 16% after exemptions in some states – again payable within 9 months after death. For example, if the taxable estate (federal and state) is $5 million, the executor may have to raise $3 million to pay all taxes within 9 months after death. This puts undue pressure on the executor to sell assets (or borrow money) under possibly unfavorable market conditions.