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What is an Estate Tax Exemption?

What is an Estate Tax Exemption? An estate tax is a tax on the assets that are transferred upon the death of a person weather that transfer is by will, trust or insurance payment.  There is also the associated gift tax which restricts the transfer of property while the individual is alive, to prevent circumventing estate tax laws.  Estate tax in the United States has changed dramatically in recent years with the elimination of federal tax credits to states for collecting estate taxes.  As such, many but not all states and localities have ceased collecting estate taxes and left the federal government as the sole decider of collection and estate tax exemptions.

What is the current estate tax exemption?

The current federal estate tax exemption for deaths occurring in 2010 is $5 million dollars for a single person.  This is doubled for married couples.  The value of any estate above this estate tax exemption will be subject to federal estate tax.

Spouses and charitable organizations also receive estate tax exemptions, with no limits.  Children and other families however, will be subject to estate taxes on estates valued at over $5 million.

How is the estate tax calculated?

The estate tax is calculated from the gross estate.  There are considerations for the amount of estate owed to the spouse, items no longer part of the estate or transferred within the past three years and the value of certain annuities.

What are deductions to estate tax?

There are some exemptions to the taxable estate, as defined by Chapter 11 of the Internal Revenue Code.  

- Funeral expenses
- Charitable contributions
- Items left to the spouse, only if the spouse is a US citizen
- States paid to states that maintain estate and inheritance taxes (post 2005)

What are some states that still have inheritance taxes?

Ohio and Kentucky still maintain estate or inheritance taxes and most states will have a “pickup” provision.  The pickup provision would impose a state tax in the event that the federal government stops collecting estate taxes.

Are estate tax exemptions subject to change?

The estate tax exemption has changed constantly, varying by year, necessitating the need for an estate lawyer.  The estate lawyer will be up to state on estate laws and estate tax exemptions applicable to your area and will help you maximize the benefit received through the transfer of an estate.  The estate lawyer will also assess gift tax rates and exemptions to determine if it may be necessary to gift some items from the estate prior to the death of the estate holder.  The current gift tax exemption for 2010 is $13.000 per recipient, per year.  In this way the holder of the estate can reduce the size of the estate before it is subject to taxation.

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