Federal Estate Tax

The federal estate tax is a tax on your right to transfer property at your death. The amount exempted from tax by the unified credit was $5 million in 2011 and $5.2 million in 2012 with a taxation rate of 35%.   In 2013, on January 1, 2013, Congress passed the American Taxpayer Relief Act ("ATRA" for short) and President Obama signed it into law on January 2, 2013.   The unified credit has increased to $5,340,000 (40% tax rate).     The tax will be applied to your entire estate if you are a resident or citizen of the United States at the time of death. If you were neither a resident nor a citizen, the tax will be imposed on the value of property you owned located in the United States.

The gross estate (before the modifications) is the value of all the property interests of the decedent at the time of death.   At your death, your gross estate that will be calculated for estate taxes will consist of everything you own, where ever located, on other property transferred during life over which you retained some interest or control, and, under certain circumstances, property given away within three years of your death.

Your taxable estate is very different from your probate estate. For example, while property owned as joint tenants, or property for which you have designated a beneficiary (life insurance, retirement plans) are not included in your estate for probate purposes, they will, nevertheless, be included in your estate for the calculation of federal estate tax.

If the value of all assets owned by you and your spouse exceed the exemption amount described above, an estate plan which results in the surviving spouse receiving all the assets may result in estate tax liability at the death of the second spouse. This, in turn, reduces the amount available for your children or other beneficiaries. Married couples may benefit by two times the exemption amount of $5,340,000 million in 2014 if the couple has an estate plan drafted to take full advantage of each spouse's own credit or have taken administrative steps to preserve the portability provision for married couples after the death of the first spouse. (see Marital Deduction and Utilizing the Unified Credit).

When considering into the mix of your gross estate your pensions, retirement accounts and life insurance death benefits, it's easier than you may realize for a working couple to be subject to the estate tax. The marginal tax rate on the value of your estate over the exemption amount is 40%.

Even if your total estate will avoid the payment of estate taxes without an estate plan, your estate will still be subject to probate costs and fees if your assets are more than $150,000 which is the probate threshold in the State of California.