ESTATE TAX: The Government taxes you even when you die! The tax rate begins at 37% and tops out at 55%.
WHAT ARE ESTATE TAXES?
Some people may call these "transfer" or "death" or inheritance taxes. A lawyer would call them the Federal Unified Gift and Estate Tax. This is a tax you must pay to the IRS for the privilege of transferring property to another person either while you are living or at death.
HOW MUCH IS THE TAX?
The rate of taxation begins at 37% and tops out at 55%. The more you have the higher percentage you pay. The following is an example of the amount of tax due on specific amounts:
- TAXABLE ESTATE
- FEDERAL ESTATE TAX
- $ 675,000
- $ 0
- $ 750,000
- $ 16,900
- $ 850,000
- $ 46,800
- $ 183,550
- 55% on the amount over $3,000,000
HOW DO I FIGURE OUT IF I'M GOING TO HAVE TO PAY TAXES?
Basically, take the net amount of everything you own when you die and everything you have given away over the $10,000 annual exclusion per year. If this amount is above $675,000, you will owe estate tax.
For example, if you own a $100,000 house but still owe $30,000 on it, you only count $70,000 as part of your taxable estate. In other words, you only count the equity you have in something, not its gross value as you do in the probate estate.
You also must count the property that you have given away. For example, if you gave eighty acres worth $100,000 to your son, you would subtract $10,000 for what you can give per year and if you are married, $10,000 for what your spouse can give. For this example, we will assume you are married. $100,000 minus $20,000 leaves $80,000. $80,000 is the amount you would add to your taxable estate. (Incidentally, you are supposed to file a gift tax return if you give more than $10,000 in one year to one person.)
Now, you add up what you have when you die plus what you gave away over $10,000 per year per person, and if the amount is over $675,000 then you must pay estate tax.
WHEN DOES THE TAX HAVE TO BE PAID?
The general rule is that it must be paid in cash nine months after your death.
CAN'T I LEAVE EVERYTHING TO MY SPOUSE AND NOT PAY ESTATE TAX?
Yes, this is done using the Unlimited Marital Deduction. This means that you can give an unlimited amount of property to your spouse. Upon the first death, no estate tax has to be paid,but upon the death of the surviving spouse, any amount over $675,000 will be taxed.
SHOULDN'T EVERYONE USE THE UNLIMITED MARITAL DEDUCTION?
You better crunch the numbers first. Let's say you and your spouse are worth $850,000. Lets say you die first and leave everything to your spouse using the Unlimited Marital Deduction. There are no estate taxes due at your death. When your spouse dies, she must pay $46,800 to the IRS. This is a good deal only for the IRS.
If you set up a trust, you can use both your $675,000 exemption and your spouse's $675,000 exemption. When you die, there will be zero estate taxes due. When your spouse dies, there will be zero estate taxes due. This is not a good deal for the IRS.
HOW MUCH IS THE INHERITANCE TAX?
Technically, there is no inheritance tax. With an inheritance tax, your heirs pay a tax on the amount they receive. In today's world, the IRS gets their money before the heirs ever get their hands on it. In other words, the money being left to them is not being taxed twice.
IS THERE AN ARKANSAS ESTATE TAX?
Yes. However, you get a credit on the Federal Estate Tax. In essence, you do not pay any extra.
HOW DO I GET OUT OF PAYING ESTATE TAX?
If you and your spouse's taxable estate is less than $675,000 you will owe no estate tax, unless the laws are changed.
If you and your spouse's taxable estate is between $675,000 and $1,350,000, an estate planning attorney can get you out of paying any estate tax with a properly drafted trust. There will be restriction on part of the money after the death of the first spouse, but not enough to outweigh the thousands of dollars in savings. For example, the surviving spouse:
- gets all the income generated off the restricted portion
- can use all principle to maintain her standard of living, i.e., put a new roof on the house. However, the surviving spouse probably could not take half the principal and go play blackjack at a casino.
- can receive 5% or $5,000 of the principal, whichever is greater per year