If you have inherited an estate whose value exceeds the limit for non imposition of estate taxes, then this is another tax you will need to pay.Estate Tax is part of the Unified Gift and Exchange Tax System. This tax is imposed on the transfer of taxable estate of every decedent who is either a resident or a citizen of the United States.
This tax is imposed irrespective of whether the estate was transferred through a will or through the state laws of intestacy.
The Estate Tax is imposed on transfer of taxable estate after the death of a person while the other half of the Unified Gift and Exchange Tax System, the Gift Tax is imposed on the transfer of taxable estate during the life of the owner.
The laws on Estate and Gift taxes are said to be one of the most complicated in the US taxation system.
How Is Estate Tax Calculated?
Calculation of estate tax begins with estimation of the ‘gross estate’. This may be different and include more property than that stated in the ‘probate estate’. An example of properties which may be added to the probate estate to arrive at the gross estate includes value of property transferred by the decedent before his death where the transfer can be revoked, etc.
From this ‘gross estate’ certain deductions are allowed to arrive at the value of the taxable estate. These deductions include funeral expenses, donations to charity, certain items of property left to the surviving spouse, etc.
What Is The Current Rate Of Estate Tax?
The rate of estate tax depends on the value of the taxable estate, with small value estates being exempt from this tax. The exemption limit for 2009 has been fixed at $3.5 million.
The maximum rate of estate tax for 2009 has been set at 45%. This tax has been repealed for 2010 but will come back into force in 2011 at the rate of 55% and the pre 2001 exemption level of $1 million.
Whose Responsibility Is It To Ensure that The Tax Is Paid?
The executor of a decedent’s estate has to fill up Form 706 to determine the estate tax payable on his/her taxable estate as per the Chapter 11 laws of the Internal Revenue Code. This tax is imposed on the entire taxable estate and not just on the share of a particular beneficiary. Instructions on who must and how to fill up Form 706 are available at http://www.irs.gov/pub/irs-pdf/i706.pdf.
Should The Estate Tax Be Abolished?
Many countries have abolished the estate tax, and there are others where this is under consideration. Estate tax rates in the US are one of the highest in the world.
There are many who believe that the estate tax should be abolished as it generates significant tax avoidance activity and often results in the estates being broken up and sold to raise funds for the taxes as most often such estates have high valuations but do not generate much cash.
There is however a significant group which supports the continuation of this tax and believes that estate taxes prevent wealthy families from continuing to enjoy their wealth free of tax. They also point out that farmers and small estate owners whose causes the opponents to this tax support are usually exempt from this tax in any case.