Estate Tax Facts and Tips

Benjamin Franklin said that, in life, nothing is certain except death and taxes. If you have a large estate, you can also be pretty sure the government will tax it when you die.

Does every estate pay estate tax?
No. In fact, most estates pay no estate tax. The government allows a certain amount of an estate's value to be exempt from estate taxes. Most estates fall below this amount.

For example, in 2008 the exempt amount is $2 million for an individual ($4 million for a couple).

• If your estate is valued at $1 million, you wouldn't owe any federal estate taxes.
• If your estate is valued at $2.5 million, you would owe tax on the amount over $2 million. That amount ($500,000) would be taxed at 45 percent.

Your estate consists of everything you own. This includes property, bank accounts, stocks and bonds, business interests and other valuables. While most people's estates are valued well below the exemption amount, it's a good idea to make a careful accounting of your estate. You may be surprised to see how much you're actually worth.

How can I minimize estate taxes?
No one wants to pay more taxes than they have to. Luckily, there are ways you can reduce your estate tax bite.

• Give it away while you're alive. Federal law allows a person to give a certain amount of money away each year to anyone - tax-free. To get your estate below the exempt amount, you could give as much as $12,000 a year to each of your children, siblings, nieces, nephews and friends.
• Leave it to your spouse. In general, you can leave any amount of assets to your spouse without it being taxed. But if there's a chance that your combined estate would have a value over the exempt amount, you might want to set up a trust instead.
• Create a trust. Putting assets in a trust is often the best way to protect the value of an estate. A trust can generate income for your spouse as long as he or she lives. When your spouse dies, the assets will be divided among your remaining heirs.
• Leave it to charity. Gifts to charities are not taxed as long as the group operates for religious, charitable or educational purposes. You can find out if a charity qualifies for tax-deductible status by checking the IRS Web site at www.irs.gov/charities.

Remember, it's important to get the advice of an estate attorney, CPA or other estate planner. Estate tax laws are complicated and the laws change often. A professional can help you look at your whole financial picture and help you make the best decisions for your situation.

Related Articles Basics of Estate Planning

External Sources Center on Budget and Policy Priorities. The estate tax: myths and realities. Revised October 11, 2007. Accessed March 7, 2008. Federal Citizen Information Center. Life advice about estate planning. Accessed March 7, 2008. Internal Revenue Service. Frequently asked questions on estate taxes. Accessed March 7, 2008.

Search