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Estate Taxes

This page is http://www.ca-probate.com/estate_tax.htm

The "estate tax" (also called an inheritance tax or death tax) is a special tax on property left by a deceased person. In the U.S., there are separate federal and state estate taxes, but most state death taxes, including California's, can be claimed as a credit against the federal estate tax. The overall estate tax rate thus remains uniform in most states. However, some states, including a few "retirement states," retain inheritance or estate taxes that are owed on smaller estates that are not subject to federal estate tax.

$625,000 Exemption Equivalent: Technically, the estate tax is imposed on all estates, but each taxpayer has a huge tax credit (the "unified credit"); this credit will correspond to the estate tax on bequests and gifts of $625,000 (as of 1998). The practical result is that there is no estate tax if a deceased person leaves less than $625,000 worth of property.

The "Taxpayer Relief Act of 1997" pledges to increase the exempt amount by an additional $25,000 in 1999, 2000, and 2002, and then by larger amounts starting in 2004. See separate newsletter article about the Estate & Gift Tax Law Changes in the 1997 Budget Act.

No Estate Tax for Bequests to Spouse or Charity: There is no estate tax on any property left to a surviving spouse or to a qualified charity. Wealthy married persons can leave $600,000 to their children and the balance of their estates to a surviving spouse (or charity), completely avoiding any estate taxes.

Property left to a surviving spouse will be subject to estate taxes at the time of the survivor's death, if it is not left to charity (or to a new surviving spouse).

Forbes magazine wrote in October 1993 that Warren Buffett was then the richest man in America, with more than $8 billion in assets. According to Forbes, Buffett and his wife plan to leave their entire estate to private charitable foundations after they die -- avoiding $4.4 billion in estate taxes.

Tax Rates: The estate tax is computed based upon the total value of all property transferred due to the deceased person's death (excluding bequests to a surviving spouse or to charity). Usually, the value for estate tax purposes will be larger than the "probate estate," which usually does not include life insurance, retirement accounts, or joint tenancy property.

As of January 1998, the estate tax starts at a marginal rate of 37% at $625,000, rising gradually to 55% for estates of $3 million or more. (A 5% tax surcharge applies to estates from $10 million to about $21 million. This marginal 60% estate tax bracket "phases out" the "unified credit" and lower estate tax brackets, so that a full 55% estate tax is collected on estates above $21 million.)