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What Is the Federal Estate Tax Exemption?



The U.S. estate tax was established for the transfer of an estate that is taxable for a decedent. The estate tax applies whether the estate property at issue was devised by will, under intestate succession laws at the state level, transfer of property from an intestate trust or estate, or payment of life insurance benefits to beneficiaries. Often the tax is not applicable to situations in which estate property is transferred to a spouse or charity. The federal estate tax is one of two components to the U.S. Unified Gift and Estate Tax system. The other component to that system is the gift tax, which is a tax assessed on transfers of estate property made during a person's lifetime (as opposed to upon or after death).

Federal Estate Tax Exemptions Increase While Federal Estate Tax Rates Decrease

The federal estate tax exemption has steadily increased for over the last 13 years. Yet, the corollary estate tax rate has simultaneously decreased during that same period. The federal estate tax was first enacted back in 1916 and continues in much the same form today.

Recent Federal Estate Tax Exemptions and Corresponding Federal Estate Tax Rates

In 1997, the federal estate tax exemption was capped at $600,000, while the corresponding tax rate was a much higher 55 percent. The tax rate stayed the same for the next four years, through 2001. However, the exemption increased steadily during that time to reach $675,000. Then, in 2001, the federal estate tax rate was cut to 50 percent, while the exemption nearly doubled to a significant threshold of $1,000,000. That exemption stuck for another year, and the rate dropped to 49 percent. The exemption continued to increase in 2004 to $1,500,000, while the tax rate only fell to 48 percent. In 2005, the exemption stayed the same, and the tax rate fell an additional single percent to 47 percent. Tax year 2006 brought the increase to the $2,000,000 mark for the federal estate tax exemption, with a fall to 46 percent for the tax rate. In 2007, the exemption stayed the same, and the rate fell an additional single percent. There was absolutely no change in 2008 on either figure. In 2009, the exemption shot to nearly double the amount, or $3,500,000, with the tax rate staying at 45 percent. The next three years, 2010 through 2012, were defined by new legislation.

New Legislation Impacts Estate Tax Exemptions and Tax Rates

Specific to 2010, 2011, and 2012, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act that was enacted on Dec. 17, 2010, when it was signed into law by President Obama, governs the rates for those years. The tax relief law lasts for two years only, as it is scheduled to sunset at the close of 2012. As a result, the federal estate tax exemption and the federal estate tax rate for the 2013 tax year will revert back to the figures that applied in 2002. Specific to tax year 2010, tax filers and tax payers have an election they can make. For 2010 only, heirs of decedents who pass away in 2010 have the option of taking the $5,000,000 federal estate tax exemption coupled with a 35-percent federal estate tax rate, or alternatively, a $0 federal estate tax exemption with a 0-percent federal estate tax rate, combined with utilization of the modified carry-over basis rules.