If you or your loved ones are drawing up an estate plan, you’ve most likely heard about the estate tax. The federal tax on your right to transfer property at the time of your death can be a major factor in deciding what property is left to your survivors and must be taken into consideration when finalizing an estate plan.

Determining the estate tax involves a careful and detailed accounting of everything you own or have certain interests in at the date of death. You may use Internal Revenue Service Form 706 (“United States Estate [and Generation-Skipping Transfer] Tax Return”) when calculating the estate tax, which is imposed by Chapter 11 of the Internal Revenue Code.

Determining Your Gross and Taxable Estates

To begin the process of determining your estate tax, find the fair market value of the items to be used. You should include all real estate, cash and securities, insurance, trusts, annuities, business interests, and other assets. Note, this is not necessarily what you paid for them or what their values were when you acquired them, but rather, what they are worth now. The total value of all of these items is called your Gross Estate.

After applying any and all applicable deductions (such as mortgages and other debts, the expenses from administering your estate, etc.) and reductions to the value of the included items in your Gross Estate, you will arrive at your Taxable Estate. Some estates may qualify to reduce the value of operating farms or other business interests, so be sure that you are applying all the proper deductions and adjustments to your estate.

Once you have calculated the net value of your estate (your Taxable Estate), the value of any lifetime taxable gifts made beginning in 1977 is added to the total estate value and the estate tax is computed.

The 2010 Break in the Federal Estate Tax

As of June 2010, there is no federal estate tax assessed for deaths occurring during 2010. However, this one-year exemption is being hotly debated and the tax is expected to be back in effect on January 1, 2011 (if not sooner) at a top rate of 55%, although when the tax might be reactivated, how it would be applied, and at what rate have not been decided.
 
In rare cases involving just the wealthiest two percent of Americans, the final estate value may be reduced by any available unified credit. As of June 2010, the unified credit can reduce the computed estate tax so that only total taxable estates and lifetime gifts that exceed $1 million will actually have to pay the tax.

Does Your Estate Require an Estate Tax Return?

Most people have relatively simple estates (those consisting of cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) which do not require the filing of an estate tax return.

An estate tax filing is required only for estates with combined gross assets and prior taxable gifts exceeding $3.5 million for decedents who died on or after January 1, 2009. If your estate requires such a filing, it must be filed with the IRS no later than nine months after the death, unless an extension is granted. The estate taxes also are due to be paid no later than nine months after the decedent’s death, unless that deadline is extended.

Section 6651 of the Internal Revenue Code provides for stiff penalties for both late filing and late payment of estate taxes unless there is a reasonable cause for the delay.

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