What Is the Inheritance Tax Rate?

he federal estate tax is a tax on the taxable value of the estate.

The federal government and the state governments have the right to impose a tax on the assets of someone who dies (a decedent). The federal estate tax is a tax on the taxable value of the estate and is the responsibility of the personal representative (an executor or an administrator). State taxes are also a tax on the taxable value of the estate, but they're usually the responsibility of the beneficiaries.

The Facts

To determine whether a federal estate tax return has to be filed, several items must be reviewed. The initial factor is whether the decedent was a citizen or resident of the United States when he died. The second is the value of the estate, which is determined by the value of the decedent's assets as of the date of death. "Value" refers to fair market value, or the price a willing buyer would pay to a willing seller. If the decedent left a will, the will should indicate the assets of the decedent.

The third factor is the amount of taxable gifts that the decedent made during her lifetime. The federal government allows tax-free gifts to be made to certain people in defined amounts ($13,000 for 2009), but gifts in excess of the defined amounts may be subject to a gift tax.

Estate Value

The gross estate includes all property in which the decedent had an interest (including real property outside the United States). It also includes such items as cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. The IRS allows the personal representative to deduct a number of items from the gross estate to determine the taxable estate. These include personal debts, mortgages, funeral expenses and the costs to administer the estate and more. The gross estate value minus the value of all valid deductions is the taxable estate.

Tax Rate

The tax rate can vary from year to year. For example, in 2009, the federal estate tax rate started at 18 percent and the maximum tax rate was 45 percent. The federal estate tax rate was repealed for 2010, meaning there was no 2010 federal estate tax rate and, thus, no need to file a 2010 federal estate tax return. However, in 2011, the federal estate tax rate is scheduled to start at 37 percent and increase to a maximum of 55 percent. All future estate tax rates may be subject to change by Congress.

Unified Tax Credit

After the amount of the taxable estate is figured and the tax determined, the federal government allows for an additional deduction called a unified tax credit. The amount of the unified tax credits also can vary each year. For the years 2002-2009, a unified tax credit in the amount of $1,455,800 was applied against any estate tax that was due. For 2009, this credit was such that for any taxable estate worth $3.5 million or less, no tax was due.

For the years 2002-2009, a unified tax credit in the amount of $345,800 was applied against any gift tax that was due. For 2009, this credit was such that for any lifetime gifts (excluding gifts that were tax-free) totaling less than $1 million, no tax was due. Any tax credit that's not applied against the gift tax can, in some cases, be credited against the entire estate. This is where the gift and estate taxes are linked.

Considerations

States also can levy their own taxes, and most states do. Like federal taxes, the personal representative has to figure the gross estate first and the taxable estate second. The definitions for the assets that form the gross estate and the deductions allowed differ slightly from the federal definitions.

State tax rates are also different from the federal government's. In some states, the tax is a straight percentage, while others may have graduated rates, like the federal tax rate. In still other states, a beneficiary's tax rate is determined by how he was related to the decedent.

The amount of state estate taxes paid can be deducted on the federal return.

Expert Insight

It may be best to review tax issues with an accountant or estate attorney before filing any returns. It also can be a good idea for a person who thinks her estate might be subject to federal or state estate taxes to consult an estate attorney or estate planner, who can help direct the ways the estate is ultimately distributed to minimize tax consequences.

References

• Internal Revenue Service (IRS): Home Page.
• IRS Publication 950: Introduction to Estate and Gift Taxes.
• IRS Form 706: United States Estate (and Generation-Skipping Transfer) Tax Return.
• IRS Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return.
• IRS: FAQs About the New Tax Rules for Executors for 2010