A Federal Estate Tax Discussion: Some Basic Information

By Thomas Rose | Mon, 3 Nov 2008

Some Basic Information

The General Rule:   When a person passes away, a federal estate tax may be levied on the transfer of property owned by the decedent.

Exception #1 to the General Rule:  However, if the estate is distributed to the surviving spouse who is a United States citizen, the estate is not subject to the federal estate tax. 

Exception #2 to the General Rule:  There is an exemption to the federal estate tax which frees many estates from the imposition of the federal estate tax. 

The estate includes all of the assets owned by the decedent on the date of death, including both Anon-probate assets and Aprobate assets.  Non-probate assets may frequently consist of property held in retirement accounts, life insurance policies, property held in a living trust, and other possessions that pass by contract (for example, banks and brokerage companies will almost always require that you designate the future owner of your accounts upon death) or under state property law. Probate assets may include real property, stocks, bonds, certificates of deposit, cash, and items of personal property. 

The taxable estate under federal law includes both the probate and non-probate assets, less the expenses to administrate the estate. The federal estate tax is calculated on the taxable estate, and the federal tax return (and normally any federal estate tax which is owed thereunder) must be filed (and taxes paid) within nine months after the death of the decedent. 

Currently in Texas there is no state inheritance tax. 

Major Federal Estate Tax Changes Implemented In 2001

Many important changes in federal estate tax law were implemented by Congress under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). In the year 2010 the estate tax will be fully repealed - and a new federal taxation framework will be implemented in 2011. The exemption equivalent will be $2 million for calendar years 2007 and 2008, then increased to $3.5 for the 2009 calendar year. The top estate tax will be lowered to 45% in the year 2007. After 2009, there will be no estate tax, but a 35% gift tax will be collected.

Calendar Year	Estate Exemption Amount	Estate Tax Rate	Gift Exemption	Comments
2008	$2 million	45%	$1 million
2009	$3.5 million	45%	$1 million
2010	[estate tax repealed]	[35% gift tax]	$1 million	modified step-upbasis
2011	$1 million	55%	$1 million	estate tax restored

Modified Step-up In Basis After 2010

After the calendar year 2010, the federal estate tax and the federal generation-skipping tax will be repealed.  A modified carryover basis plan is then scheduled to be implemented. An estate will be allowed an asset base with gain of $1.3 million to be stepped-up to fair market value. And transfers on death to a surviving spouse will permit the surviving spouse to take advantage of an additional step-up in basis of $3 million, which may be allocated among specific estate assets. 

Estate executors will be subject to extensive basis reporting requirements to the Internal Revenue Service. Executors who fail to timely file these federal reports with the Internal Revenue Service could be subject to a $10,000 penalty. 

Federal Gift Tax Changes In 2010

After the calendar year 2009, the federal gift tax will be pegged at the individual donor's top income tax rate for the applicable year. Currently this rate is thirty-five percent under EGTRRA, but if this rate is changed by Congress, the maximum gift tax rate will also change. The federal gift tax discourages taxpayers from making gifts to beneficiaries with lower incomes in order to minimize the federal capital gains tax. 

Future Federal Legislation

You should carefully monitor the actions of Congress between now and the year 2011.  Many commentators believe that Congress may attempt to completely overhaul existing federal estate tax and federal gift tax legislation, entirely changing established law and interfering with well-settled estate planning techniques.