Federal Estate Tax Q and A


Do all estates pay Federal Estate Taxes?

No. Federal law provides every person with an exemption known as the "unified credit." Under current law, the unified credit equivalent amount is $675,000 (2000). This amount gradually increases to $1,000,000 in 2006. If your estate at the time of your death is less than the available unified credit amount, your estate will pay no federal estate taxes. However, due to even moderate growth, a person with a $675,000 estate in 2000, could expect to have an estate of $1,000,000 in 2006. The following chart illustrates the gradual increase of the unified credit equivalent amount and the growth of a $675,000 estate at variable growth rates:

Year Unified Credit 8% Growth 12% Growth
2000 $675,000    
2001 $675,000 $729,000 $756,000
2002 $700,000 $787,320 $846,720
2003 $700,000 $850,305 $948,326
2004 $850,000 $918,330 $1,062,125
2005 $950,000 $991,796 $1,189,580
2006 $1,000,000 $1,071,140 $1,332,330

How is liability for Federal Estate Taxes determined?

Federal Estate Tax is an "everything" tax. Jointly held property, life insurance policies, investments, real estate, retirement plans and personal property are included in the value of your gross estate. Federal Estate Taxes start at 37% and climb very quickly to 55%. Federal Estate Tax returns must be filed and full payment made within nine months after the date of death.

The "Unlimited Marital Deduction."

The federal government provides that no federal estate taxes are paid on transfers between married couples, provided that the surviving spouse is a United States citizen. This is referred to as the "Unlimited Marital Deduction." Regardless of the size of a married couple's estate, no federal estate taxes will be levied upon the death of the first spouse if everything is left to the surviving spouse. However, there may be serious tax consequences if you do not utilize your unified credit amount.

Couples can be lulled into the mistaken belief that they do not need to concern themselves with Federal Estate Tax if there is an unlimited marital deduction. This mistake can cost their family tens of thousands of dollars in unnecessary Federal Estate Tax.

For example, assume that a married couple leaves a combined estate of $1,350,000. Assume further that they own all property in joint tenancy or that they have wills that leave everything to the surviving spouse. There is no tax on the first death, the surviving spouse can only protect $675,000 (2000) from Federal Estate Tax. The remaining $675,000 is fully taxable. The tax on this amount is $270,750. This entire tax could have been avoided with a proper estate plan.

What is state inheritance tax?

State inheritance tax is a tax on the amount you inherit from a deceased individual. It is a tax that is assessed regardless of the size of the estate. The inheritance tax rates in Nebraska are as follows:

Class One: Persons related to the deceased as the father, mother, grandfather, grandmother, brother, sister, son, daughter, grandchildren and the surviving spouse of any of the above will pay tax of one percent (1%) on the excess of $10,000 per beneficiary.

Class Two: Persons related to the deceased as the aunt, uncle, nephew, niece, lineal descendant of the above persons and the surviving spouse of any of the above will pay a tax of six percent (6%) on any sum received between $2,000 and $60,000 and will pay a tax of nine percent (9%) on the excess over $60,000.

Class Three: For all beneficiaries other than the surviving spouse and charities, the tax is graduated as follows:

$500 to $5,500 6%
$5,500 to $10,500 9%
$10,500 to $20,500 12%
$20,500 to $50,500 15%
over $50,500 18%