What Is the Estate Tax?
The estate tax is a tax on property that transfers to others upon your death. Estate taxes are due on the
total value of your estate — your home, stocks, bonds, life insurance, and other assets of value.
Everything you own, whatever the form of ownership, regardless of whether the assets have been through
probate, is subject to estate taxes.
Also referred to as the “death tax,” the estate tax was first enacted in this country with the Stamp Act of
1797 to help pay for naval rearmament. After several repeals and reinstatements, the Revenue Act of 1917
put the current estate tax into place. Despite its long history, this tax remains controversial.
By working in much the same way as marginal income tax brackets, estate taxes claim a graduated
percentage of the total value of your estate. For estates of greater value, the percentage amount due in
taxes is generally higher.
The IRS calculates the estate tax due on your gross taxable estate by adding the value of your assets and
then subtracting any applicable exemptions.
The most common exception to the federal estate tax is the unlimited marital deduction. The government
exempts all transfers of wealth between a husband and wife from federal estate and gift taxes, regardless
of the size of the estate. Of course, the surviving spouse must be a U.S. citizen to qualify for this
exemption. When the surviving spouse dies, the estate will be subject to estate taxes and, unless the
appropriate preparations have been made, only the surviving spouse’s applicable credit can be used.
Other exemptions include mortgage and other debt, administration expenses of the estate, and losses
during estate administration.
The Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes to the federal
estate tax. It established a schedule that loweredthe top estate tax rate and raised the applicable credit
amount gradually over several years. In 2010, the federal estate tax is scheduled to be repealed. However,
because of the tax law’s sunset provision, the federal estate tax will return in 2011 at its previous maximum
level unless Congress votes to permanently repeal the tax. (See the table for applicable credit amounts
and top estate tax rates.)
Year Applicable Credit Top Estate Tax Rate
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 Tax repealed 0%
2011 $1 million 55%
Check with your tax advisor to be sure that your estate is protected as much as possible from estate taxes
upon your death.