Estates are subject to two kinds of taxes: Federal Estate Tax and State Death Tax. The federal estate tax has a minimum of 18% and a maximum of 45%. There is, however, an exemption from this tax if the value of your estate is below a certain threshold. In 2007, for example, an estate worth less than $2,000,000 would not be subject to federal estate tax. This exemption amount increases annually as follows:
2007 - $2,000,000
2008 - $2,000,000
2009 - $3,500,000
2010 - unlimited
The future of estate tax is uncertain. Under current law, there will be no estate tax in 2010 – in other words, the exempt amount will be unlimited. This phase-out, however, could be short-lived. The federal estate tax is scheduled to be reinstated in 2011 unless further legislative action is taken.
Example: If your federal taxable estate is worth $2,100,000 in the year 2007 (thus $100,000 over your exemption), then your total federal tax liability would be $45,000. You can figure out your tax liability at the following website: www.IRS.gov.
In some states (such as California), there is no separate state death tax and you are not required to file a CA Estate Tax Return. However, there are states that impose a separate state-based estate tax. Additionally, even if you reside in a state without an estate tax, you may still be subject to tax if you hold property (like real estate) in a state that does have an estate tax. For more information on how your estate will be taxed, it is recommended to consult an estate planning attorney.
