Frequently Asked Questions about
Estate Planning, Wills, Trusts, and Probate

• Will I owe federal or Virginia estate taxes?

The estate tax, sometimes called the “death tax,” is a wealth tax imposed on property left by a deceased person. There are separate federal and state estate taxes. For Virginians dying before July 1, 2007, Virginia's state estate tax began at about 8 percent on estates over $2 million, and rose to about 16 percent for estates over $10 million. Thankfully, the Virginia estate tax has been repealed for the estates of people dying on or after July 1, 2007.

The federal estate tax is being phased out under the Economic Growth and Tax Relief Reconciliation Act of 2001, but it hasn't gone away yet. And it could still return from the grave in 2011 under the sunset provisions of that Act, unless Congress gets moving.

Technically, all estates are liable for estate tax, but each taxpayer has an federal estate tax exclusion (for persons dying in 2008) amount of $2 million. The practical result is that there usually is no estate tax payable if a deceased person who has not made large gifts during his lifetime leaves less than $2 million worth of property. (In 2009, the estate tax exclusion amount will increase to $3.5 million. The estate tax (but not the gift tax) is eliminated entirely in 2010, but is scheduled to return again in 2011.)

This $2 million exclusion sounds like a huge amount to most young families, but in fact, many Northern Virginia homeowners with IRAs or 401(k) retirement plans, a moderate amount of home equity, and reasonable amounts of life insurance and personal savings have "estate net worth" figures approaching or above $2 million. This means that, unless they take action to reduce their estate taxes, every dollar they leave their children above the $2 million exclusion will be taxed at federal rates currently at 45 percent  – with even higher effective rates for many retirement account distributions (which may be subject to income taxes as well as estate taxes).

No federal estate tax is imposed on any property left outright, or in certain types of trusts, to a surviving U.S. citizen spouse, or on property left to a qualified charity. Married people who are U.S. citizens therefore may leave up to $2 million to their children and the balance of their estates to a surviving spouse (or charity), completely avoiding any estate taxes at the time of the first death. But property left to that surviving spouse will be subject to estate taxes at the time of the survivor’s death (unless it is left to charity or to a new surviving spouse).

The estate tax is levied at high marginal rates, and is computed based upon the total value of all property (including proceeds of insurance policies owned by the deceased person) transferred due to the deceased person’s death (excluding bequests to a surviving spouse or to charity). The value of an estate for estate tax purposes generally will be substantially larger than the “probate estate,” which usually does not include life insurance proceeds, retirement accounts, entireties or survivorship property, or property held in revocable living trusts.

As of January 1, 2008, the federal estate tax is set at a marginal rate of 45% for estates of more than $2 million.

Examples of calendar-year 2008 federal estate tax computations:

“The taxpayer: Someone who works for the government but doesn't have to take a civil service examination.” –Ronald Reagan