The Federal Estate Tax

The federal estate tax is applied to transfers of property after a death. All property owned by the deceased is subject to the tax, including property held by trusts under the control of the deceased. However, in 1981, the Congress made several changes in the law, and most medium-sized estates are not taxed now.

Estate Tax Marital Deduction

Federal law allows an unlimited marital deduction, which means that either spouse in a heterosexual marriage can leave as much as he or she wants to the surviving spouse without paying any federal estate tax.  When the surviving spouse dies, however, the estate may have substantial federal estate taxes to pay. 

Adequate tax planning can reduce or eliminate these taxes.

Exclusion Amount

The present law also allows higher tax exclusions for estates. Any estate smaller than these amounts will not have to pay federal estate taxes. The exception would be that the deceased person, while living, made gifts of more than $1,000,000 that were subject to the gift tax.  Then that person would have used up some of his/her exemption from estate tax. 

The amounts for the next few years are shown below. Most estate lawyers think the law will be changed so that estates are taxable in 2010.

Year Size of estate that passes tax free
2006 - 2008 $2,000,000
2009 $3,500,000
2010 Estate tax repealed, but a choice can be made to be treated under the 2011-2012 rules.
2011 - 2012 $5,000,000. In certain circumstances, the surviving spouse's estate can claim the unused exclusion amount of the predeceased spouse.