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The death tax or Federal Estate Tax is a tax on your right to transfer property at your death. It generally consists of everything the deceased taxpayer owns or has certain interests in at the date of his or her death. The fair market value of these items is used, not necessarily what the taxpayer paid for them or what their values were when acquired. It may consists consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.

Under current law, the tax is temporarily set at the rate of 35 percent with an exemption of $5 million. This is because tax years 2010 through 2012 are based on the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (“TRA 2010″) that was signed into law by President Obama on December 17, 2010. This law is only good for two years and so will sunset on December 31, 2012, meaning that on January 1, 2013, the federal estate tax exemption and rate will default to the numbers that were in effect in 2001/2002.  Therefore, on January 1, 2013 the estate tax is set to return at a top marginal rate of 55 percent on all assets above a $1 million exemption amount.  Furthermore, a 5% surtax will be levied on estates between $10 and $17 million making the top effective death tax rate 60%.

President Obama has proposed the permanent return of the estate, gift, and generation-skipping transfer (GST) tax regimes to the 2009 rules.  This would consist of a 45% top tax rate; a $3.5 million exemption for estate and GST tax; and a $1 million for gift tax.  The proposal would also include would make permanent the portability of unused exemption amounts between spouses, all starting in 2013.

Here is a look at Historical and Future Federal Estate Tax Exemptions and Rates:

Year Estate Tax Exemption Top Estate Tax Rate
1997 $600,000 55%
1998 $625,000 55%
1999 $650,000 55%
2000 $675,000 55%
2001 $675,000 55%
2002 $1,000,000 50%
2003 $1,000,000 49%
2004 $1,500,000 48%
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
*2010 $5,000,000 or $0 35% or 0%
2011 $5,000,000 35%
**2012 $5,120,000 35%
2013 $1,000,000 55%

*The heirs of decedents who died in 2010 had the choice to use the $5,000,000 estate exemption/35% estate tax rate or $0 estate tax exemption/0% estate tax rate coupled with use of the modified carryover basis rules.

**TRA 2010 provides that the estate tax exemption, lifetime gift tax exemption, and generation-skipping transfer tax exemption will be indexed for inflation in 2012, hence the $120,000 increase in the 2012 estate tax exemption.

 

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