Estate Tax Basics

With the federal estate tax playing a major role in estate planning, it is important to understand estate taxes and what property is subject to estate taxes.. The Federal estate tax is a tax levied not on the property owned when you pass away, but it is a tax on your right to transfer that property when you pass.

Unfortunately, the property is not taxed on the cost of the property or the value of the property when it was acquired, but the tax is levied on the fair market value of the property on the date of death. The property included in an estate is termed the gross estate, and includes the balance of bank accounts, stocks, real estate, personal property and anything else of value that the deceased owned.

The total of assets is known as the “Gross Estate.” During the probate process, bills are paid and liabilities handled, and those, along with other allowable expenses, such as funeral expenses, are subtracted from the gross estate, to determine the value of the net estate. But there is certain property that is exempt from the inclusion in the net estate, and this includes property that is transferred to a surviving spouse, which is known as the ‘unlimited marital deduction.’

If the net estate exceeds the federal threshold, the excess is taxed. During 2010, the Federal estate tax was repealed, due to a lapse in an earlier law that adjusted estate tax rates. Unfortunately, in 2011, the Federal estate tax will be back, and the federal threshold is slated to be just $1,000,000, and amounts above that will be taxed as much as 55%.

Understanding estate taxes and factoring them into a comprehensive estate plan is not something you need to do on your own. An estate planning attorney takes a holistic approach in this task, and can ensure that an estate plan makes the most of deductions, exemptions and other estate planning strategies while ensuring that your specific needs are met.