Timing is everything, even in death. In terms of death taxes, the year 2010 was a good year to die because persons dying in 2010 passed their entire estate to their heirs free of death taxes. For those dying in 2011 and 2012, $5 million can be passed to heirs free of death taxes.
You might ask "what are death taxes"? Death taxes, also known as estate taxes or inheritance taxes, are those taxes assessed on the wealth you transfer to your heirs when you die. You might think it is unfair that you are taxed on income when you first receive it and then you may be taxed again when you try to pass the estate you accumulated during your lifetime on to your children or other heirs. This is in effect double taxation and the estate tax rate is one of the highest taxes of all - - it is currently 35 percent and has been as high as 45 percent in recent years. The estate taxes are determined by the year the person (decedent) passes away, not the year the wealth is transferred. Because the amount exempt from taxes and the estate tax rate is different in 2009, 2010 and 2011/2012, the year a person dies might have a profound effect on his or her estate.
When President G. W. Bush took office, the estate tax was imposed on estates valued over $675,000. In other words, only the first $675,000 of a decedent's estate was exempt from the estate tax. President Bush immediately raised the amount that can be passed free of estate taxes to $1 million. The exemption amount was gradually increased since then until it reached $3.5 million in the year 2009. In 2010 the exemption was unlimited, so that persons dying in 2010 passed any amount of inheritance on to their heirs free of any estate tax! Even with the $5 million exemption rate in effect for 2011 and 2012, it has been reported that an estimated 99.8 percent of decedents' estates will be exempt from federal estate tax.
The current estate tax law will sunset on December 31, 2012. If Congress doesn't act to change or extend the law, the exemption amount will again be $1 million and the estate tax rate will be 50 percent. As an example of how this might be cause for concern, let's say someone has an estate worth $2 million dollars. If the person passes away and the law reverts to the $1 million exemption with a 50 percent tax rate, taxes due could be $500,000 (50 percent of the amount over $1 million).
Of course, the tax laws can and do change and some think that the tax laws will change between now and 2013. We will have to wait and see.
© 2012 by Marlene S. Cooper. All rights reserved.