You think your federal income tax rate is high?
If you think your federal income tax rate is high, consider the federal estate tax—in 2009 the rate was 45% and may be as high as 60% in 2011, depending on legislation. Add to that administrative costs and state estate taxes, and more than half of what you worked for during your life can disappear when you die. Considering careful estate strategies is one of your best protections against losing those assets you want to pass on to your beneficiaries.
Do you need to worry about estate taxes? The answer depends on how much your estate is worth and the year of death. For example, in 2011, the current law allows each taxpayer an applicable exclusion amount of $1,000,000, which can be transferred at death free of estate taxes. Those whose taxable estates exceed $1,000,000 in 2011 may be subject to a federal estate tax rate of 55% on the excess. A credit may be available for state estate taxes, if applicable.
Annual exclusion gifts of $13,000 (2010 and 2011, indexed in future years), which are of a present interest, can be given to anyone. Gifts in excess of this amount or those that do not qualify as a present interest are applied against an applicable gift tax exclusion, currently $1,000,000. Using this exclusion during life is, in effect, partially using the applicable estate tax exclusion available at death, as taxable gifts over the annual exclusion amount are added back to the taxable estate at death. You don't get both exclusion amounts.
The table below summarizes the changes in the estate and gift tax applicable exclusion amounts and decreases in the estate and gift tax rates under current law.
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During 2010, when the estate tax is repealed, there will not be an automatic step-up in basis for property acquired from a decedent. The Act adopts a modified carryover basis, providing that recipients of property from a decedent will receive a basis in that property equal to the lesser of:
- The decedent's adjusted basis in the property, or
- The fair market value on the decedent's date of death
However, a step-up in basis is retained for up to $1.3 million of property acquired from a decedent. Plus, in the case of certain transfers to a spouse, a step-up in basis will be available for an additional $3 million of property acquired from a decedent. These "step-up in basis" provisions are not available for all assets. For example, property acquired by a decedent by gift from a non-spouse less than three years before death is excluded (to prevent gifts of low basis assets in anticipation of adding to basis at death), as are properties that are considered income in respect of a decedent (such as IRAs, qualified plans, and deferred-compensation payments).
In 2011, unless new legislation is enacted, the estate tax will be reinstated with the same rates in effect in 2001, and there will again be a full step-up in basis for most assets. Also, the estate tax applicable exclusion amount reverts to $1,000,000 and is once again equal to the gift tax applicable exclusion amount.
1Applicable credit amount represents the equivalent estate tax on the applicable exclusion amount.
2Unlike the estate tax, the gift tax is not repealed in 2010, and there is a separate applicable exclusion amount for gift tax purposes. In 2010, the gift tax rate is scheduled to be equal to the highest individual income tax rate.
3Surtax consists of a 5% additional estate tax or 60% on estates between $10,000,000 and $17,184,000 to eliminate the effect of the marginal estate tax rates, effectively creating a flat 55% estate tax rate.