Federal Estate Tax

Federal estate tax, also called the “death tax”, is a tax on the total value of a person’s estate after they die.  Everything counts, including life insurance.  Since people often times inherit real estate or minerals or have large life insurance policies, this is often viewed as an unfair tax.  After all, haven’t they paid income tax on this already?

What is the purpose of the tax?

Obviously in years past, the goal was to raise revenue from the dead.  However, more recently the feds don’t want to include everyone (for political reasons), and they want to encourage certain behavior.  To achieve these two goals, the tax code allows every person an exemption amount against the tax.  Currently, the amount is $5.49 million dollars.  No tax is owed unless you have more than that amount.  Married couples get double, meaning they can exempt almost $11 million dollars from federal estate tax.  The tax code also allows deductions against any tax owed over the exemption amount.  That encourages people to gift to charities rather than pay the death tax.  Really wealthy people often give the majority of their assets to charity on their death.  Elizabeth Taylor’s jewelry was sold after her death and the proceeds given to AIDS research, one of her favorite causes to support.

Who pays this tax?

When federal estate tax is owed, who pays it?  The estate of the deceased person pays the tax before any distributions are made to the heirs.  Persons fortunate enough to be in the over $5.49 million tax bracket can do a few things to limit the amount of tax owed.  For one example, gifts to charities are a deduction against the death tax.  There are other ways to limit the amount of tax owed for those in high tax brackets.

What will the future hold for the federal estate tax?

There will be fewer families affected by the tax since the exemption amount goes up slightly each year.  Considering that, and the option of eliminating any death tax owed by giving charitably, the number of people actually paying the tax is quite small.  Considering the current political climate in Washington, it may go away all together.

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