Estate taxes, sometimes called “death taxes,” are wealth taxes imposed by Congress and state legislatures on the property owned by a deceased person at the time of his death. There is a federal estate tax, and many states levy their own estate taxes.
For Virginians who died prior to 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 Thankfully, the Virginia estate tax has now been repealed. However, 16 states, plus the District of Columbia, still levy their own estate taxes.
The federal estate tax is still with us. It was phased out under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTERRA”), and in fact was zero for people who died in 2010. But thanks to legislation passed in December 2010, it sprang back to life on January 1, 2011.
Today’s Death Tax Landscape
Death taxes are extra taxes levied on property that has already been taxed at least once.
Technically, all estates are liable for estate tax, but each taxpayer currently has a federal estate tax exclusion (for persons dying in 2012) of about $5 million. (It’s $5,120,000 for 2012 estates, to be exact, but the exclusion amount is set to decrease to $1 million on January 1, 2013.) The practical result is that there usually will be no estate tax payable at the time of death if a Virginia resident who has not made large gifts during his lifetime dies in 2012 and leaves less than $5 million worth of property in his estate. But no one knows what the rates and exclusions will be after the end of this year.
This $5 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 already have “estate net worth” figures in the $2 million-and-up range. This means that, with normal-to-robust investment growth, unless they take action to reduce their estate taxes, every dollar that moderately-well-off Virginia couples plan to leave to their children above the exclusion amount applicable at their deaths will be taxed at federal rates – currently set at 35 percent, with even higher effective rates for many retirement account distributions (because they are usually subject to income taxes as well as estate taxes).
Surviving Spouses (Usually) Pay Death Taxes Later; Charities Never Pay Them
No federal estate tax is imposed on any property left outright, or in certain types of trusts, to a surviving wife or husband who is a U.S. citizen. Nor is there an estate tax on property left to a qualified charity. Married people who are U.S. citizens therefore may leave up to $5 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 by him or her to charity, or to a new surviving spouse).
Your Estate Might Be Larger Than You Thought
Estate taxes are computed based upon the total value of all property (including benefits of insurance policies owned by the deceased person) transferred because of the deceased person’s death (excluding property left to a surviving spouse or to charity). The full value of an estate for estate tax purposes usually will be substantially larger than the value of the “probate estate,” which usually does not include life insurance benefits, retirement accounts, tenants-by-the-entireties or survivorship accounts and real estate, or property held in revocable living trusts.
Plus, there’s another tax that can seriously deplete your estate – the federal Generation-Skipping Transfer Tax, or “GST Tax.” Read on…
“The taxpayer: Someone who works for the government but doesn’t have to take a civil service examination.” –Ronald Reagan