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What are Estate and Gift Taxes?

Estate taxes are paid on your estate after you die.  As the chart below shows, estate taxes are only paid when an estate is worth more than $1.5 million.

Gift taxes are paid on gifts that you make during your lifetime.  There is an exemption limit of $1 million, so if you give less than $1 million during your lifetime, you will not have to pay federal gift taxes.  Additionally, you can give $11,000 in cash or property gifts each calendar year completely free of tax, and without contributing to your $1 million lifetime limit.

Estate taxes are a concern of many people (what is commonly called a death tax or inheritance tax).  In reality, most estates will not owe any estate taxes either federal or state.  

Have Estate Taxes been Repealed by Congress?

Effective January 1, 2002, pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001, both tax rates and exemption limits will gradually change up to 2009, leading to a phase-out of the federal estate tax system in the year 2010.  The sunset provisions of the Act provide that the Act lapses in 2009. Therefore Congress must act before then to determine the final fate of the repeal of the federal estate tax system.  The federal gift tax system is not set to fade out, and no further action by Congress is needed to keep the new $1 million exemption. 

Year
Estate Tax Exemption
(per person)
Highest Estate and Gift
Tax Rates
2004
$1.5 million
48%
2005
$1.5 million
47%
2006
$2 million
46%
2007
$2 million
45%
2008
$2 million
45%
2009
$3.5 million
45%
2010
Estate Tax Repealed
Gift Tax Rate =
Top individual income tax rate
 

My Spouse and I Have an Estate Worth less than the Estate Tax Exemption.  Do We Need to Worry About Having Taxes Taken Out of our Estate?

No. The tax only applies to your estate if it is worth more than $1.5 million in 2004.  If one spouse dies, and the second spouse then owns all the property, estate tax will only be due beyond the $1.5 million exemption in 2004. 

What Else Does the Growth and Tax Relief Reconciliation Act of 2001 Do?

The 2001 Act affects other types of taxes as well:

  • Generation-Skipping Tax: When you transfer property or cash to someone in your grandchildren's generation (skipping your children) there is a generation skipping tax applied
    • Making gifts to grandchildren or others considered to be two or more generations younger
    • Leaving property in a will to grandchildren, or those two generations younger than you (for non-relatives, that means someone who is more than 37 ½ years younger than you)

If Congress does eliminate the estate tax in 2010, the generation skipping tax will also be eliminated.  Until then, the exemption amount is the same as the tax exemption amount as shown in the table for estate taxes.

  • Basis Step-Up Elimination: Currently when you inherit property, your tax basis is the market value of the property at the date of death.  The basis is used to calculate profit that is taxable when you sell the property you inherit.  For example: you inherit a property purchased 20 years ago at $100,000, yet at the time of death 20 years later is worth $1 million.  Under current law, your tax basis is stepped-up to $1 million, so you don't have to pay taxes on the $900,000 profit.  Therefore, you will get a huge tax break when you sell, because you won't have to pay taxes on the $900,000 profit.  See captital gains tax.  This step-up rule will end if the estate tax does in 2010. 

Do I Need to Hire an Estate Planning Lawyer?

Planning your estate, if the entire amount exceeds the exemption, will be a complicated process.  With the exemption changing every year, hiring an experienced estate planning attorney is your best option for protecting your assets.  A qualified attorney can advise you on how to avoid taxes by making gifts during your lifetime, or numerous other tax strategies.
Photo of page author Ken LaMance

, LegalMatch Law Library Managing Editor and Attorney at Law

Last Modified: 06-23-2015 02:52 PM PDT

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