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Gift and Federal Estate Taxes FAQ

Answers to the most commonly asked questions about federal estate and gift taxes.

Is my estate going to have to pay federal taxes when I die?

The chances are good that your estate will not have to pay estate taxes. According to some sources, only about 1% of all estates in the United States have estate taxes imposed on them. The federal government only imposes estate taxes if your estate is worth more than a certain amount. This cutoff amount depends on the year of your death.

All property that is left to your spouse at your death is exempted from the federal estate tax, but only if your spouse is a citizen of the United States. In addition, the estate tax is generally not imposed on property that is left to a tax-exempt charity.

As mentioned in the previous paragraph, the cutoff amount depends on the year of your death. This means that the estate tax is only imposed if the value of your estate exceeds the cutoff amount.

  • For the years, 2006, 2007 and 2008, the cutoff amount is $2 million.
  • For the year 2009, the cutoff amount is $3.5 million.
  • The estate tax is repealed for the year 2010.
  • For the year 2011, the cutoff amount is $1 million. However, Congress m ay extend the repeal of the property tax from 2010.

If my estate is going to have to pay federal estate taxes, what rate will it pay taxes at?

The current federal tax rate for 2010 is 0% because the estate tax was repealed for the 2010 tax year. For the year 2011, the proposed tax rate will be 55%.

Are there steps I can take to avoid federal estate taxes?

There are a few ways that you could potentially avoid the estate tax, or lessen your estate tax liability. Here are some of the most popular options:

  • Giving Tax-Free Gifts. Under current laws (for 2010), you are allowed to give up to $13,000 per calendar year, per recipient without having to pay gift tax. In addition to giving gifts of property or cash, you can also give a tax-free gift in the form of paying someone's tuition or medical bills. By giving away property in a way that is free from taxes, you can reduce the size of your estate and possibly get it under the cutoff limit.
  • Setup an AB Trust. An AB trust is a trust where a married couple decides to set up a trust for the benefit of their children once both spouses pass away. However, if one spouse dies before the other, the surviving spouse has the right to use the trust for the remainder of his or her life. Setting up your finances in this manner can cut your taxable estate in half.
  • Setup a "QTIP" Trust.A QTIP trust allows you to postpone the collection of estate taxes until the surviving spouse dies. This could potentially lead to a lowered estate taxes, or none at all, depending on what Congress does with the federal estate tax laws.
  • Give to Charitable Trusts. This involves giving substantially to a tax-exempt charity.
  • Setup a Life Insurance Trust. This allows you to take the value of your life insurance proceeds out of your taxable estate.

Is it possible to just give away all of my property before I die in order to avoid estate taxes?

Generally speaking, you probably cannot give away all your property before you die. Under current federal laws, you can only give away up to $13,000 per calendar year, per recipient (a person or a non-charitable trust). If you give away more than this limit, that gift will have a federal gift tax imposed on it. This gift tax applies at the same time the estate tax is imposed.

However, if you can give away several $13,000 gifts every year, you can substantially reduce your estate. For example, if you give away $13,000 to each of your 30 relatives each year for the 5 years before you die, you will have reduced your estate by a whopping $1,950,000.

However, there are some gifts that are completely exempt from the federal gift and estate taxes. For example, if you are married and your spouse is a U.S. citizen, you are free to give an unlimited amount of property each year, all free from the gift tax. In addition, you are allowed to give substantially to tax-exempt charities. The same is true if the gift is in the form of paying tuition (not room and board or other expenses related to schooling) or someone's medical bills.

Are there any states that have their own estate taxes?

Yes. In addition to the federal estate tax, there are some situations in which a state will impose an estate tax even if your estate is not large enough to be taxed by the federal government.

State Estate Taxes -- Up until recently, states did not normally impose their own estate taxes. Instead, the states used to take part of the federally imposed estate taxes. However, states are no longer permitted to get a share of federal estate taxes, so some states have taken it upon themselves to impose their own estate taxes. It sometimes happens that some state laws impose estate taxes on estates that are not large enough to have the federal estate tax imposed.

As an example, New Jersey imposes an estate tax on estates in New Jersey that are larger than $675,000. However, just like the federal laws, property that is left to a surviving spouse is exempt from state estate taxes.

State Inheritance Taxes -- There are other states that impose an inheritance tax instead of an estate tax. A state inheritance tax is imposed on a deceased persons' property that is left to people. The rate of the tax depends on the relation of the deceased person to the person that inherits the property. For example, the rate of inheritance tax on property left to surviving spouses is generally very low, or nothing at all.

The states that currently impose inheritance taxes are:

  • Connecticut,
  • Indiana,
  • Iowa,
  • Kansas,
  • Kentucky,
  • Maryland,
  • Nebraska,
  • New Jersey,
  • Oregon,
  • Pennsylvania, and
  • Tennessee

Are there ways of avoiding paying state imposed estate or inheritance taxes?

If you live in a state that imposes estate or inheritance taxes, there is probably not a lot you can do to avoid these taxes. The cutoff limits for these state taxes are generally lower than the cutoff rate for federal taxes. However, if you split your time between two states, you can try to establish residency in a state that does not impose estate or inheritance taxes.

Next Steps
Contact a qualified estate planning attorney to help you ensure
that your loved ones are cared for and your wishes are honored.
(e.g., Chicago, IL or 60611)

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