Estate and Gift Tax FAQ
Get informed about estate and gift tax laws with this easy introduction.
Will my estate have to pay federal tax after I die?
Most estates more than 99% don't. The federal government imposes estate tax at your death only if your taxable estate is worth more than $5 million. Property left to a spouse (as long as the spouse is a U.S. citizen ) or tax-exempt charity is exempt from the tax.
What is the tax rate for taxable estates?
The federal estate and gift tax rate for deaths in 2011 and 2012 is 35%.
Are there ways to avoid federal estate taxes?
Yes, although there are fewer ways than many people think, or hope, there are. Here are some of the most popular:
- Tax-free gifts. You can give up to $13,000 per calendar year per recipient without paying gift tax. You can also pay someone's tuition or medical bills, or give to a charity, without paying gift tax on the amount. This reduces the size of your estate and the eventual estate tax bill.
- An AB trust, where spouses leave their property in trust for their children, but give the surviving spouse the right to use it for life. This keeps the second spouse's taxable estate half the size it would be if the property were left entirely to the surviving spouse. However, with the current $5 million personal exemption and "portability" for spouses, AB trusts are usually unnecessary. See Nolo's article Tax-Saving AB (Bypass) Trusts for more on this type of trust.
- A "QTIP" trust, which enables couples to postpone estate taxes until the second spouse dies. However, with the current $5 million personal exemption and "portability" for spouses, this type of trust is also often unnecessary.
- Charitable trusts, which involve making a sizable gift to a tax-exempt charity.
- Life insurance trusts, which let you take the value of life insurance proceeds out of your estate.
Can't I just give all my property away before I die and avoid estate taxes?
The federal gift and estate tax are really just one tax. The $5 million exemption applies to property you give away during life or leave at your death. In other words, you can transfer, either while you're living or at your death, up to $5 million of property tax-free.
Most gifts are tax-free, which means they don't count against the $5 million limit. Only gifts of more than $13,000 per year to any one person or noncharitable institution, are taxable. Making gifts of $13,000 or less, however, can yield substantial estate tax savings if you keep at it for several years.
Some gifts are exempt from the gift/estate tax no matter what their amount. For example, if your spouse is a U.S. citizen, you can give your spouse an unlimited amount of property (a noncitizen spouse can receive up to $134,000 (2011 figure) per year free of gift tax). Any property given to a tax-exempt charity avoids federal gift taxes, and money spent directly for someone's medical bills or school tuition is exempt as well.
Do some states impose estate tax?
Yes. Even if your estate isn't big enough to owe federal estate tax, the state may still take a bite.
Estate tax. Some states collect tax from estates that aren't big enough to owe any federal tax. The tax rate is generally far less than the federal estate tax rate.
For example, in New Jersey, estates worth more than $675,000 may owe state estate tax. Property left to a surviving spouse, however, is exempt from state estate tax, just as it is exempt from federal estate tax.
Can I avoid paying state estate or inheritance taxes?
If your state imposes estate or inheritance taxes, there probably isn't much you can do. However, if you live in two states winter here, summer there your inheritors may save money if you can make your legal residence in a state that doesn't impose these taxes.
For a comprehensive guide to estate planning, get Plan Your Estate, by Denis Clifford (Nolo).