An individual's death triggers three distinct Tax Returns:
1) Personal Income Tax Return - form 1040,
2) Estate Tax Return - form 706, and
3) Estate Fiduciary Tax Return - form 1041:
Tax Rates and Estate Tax Exemptions
For your information below is the Unified Estate Tax Rate Schedule, the list of Estate Tax Exemptions, and the Generation Skipping Tax (GST) Exemptions.
For the year 2020, the Tax Rate is set at the 11,800,000.00 exemption level with the estate being taxed at 40% of the value over the exemption cut off. You pay forty cents on every dollar of estate value over the exemption.
Effective 2013 and beyond, the Life Time Exemption, now referred to as the 'applicable exclusion amount', was set at $5,000,000.00, plus a calculation for inflation, which for 2020 totals $11,580,000.00 for each decedent. Any taxable estate above the applicable exclusion is now forty percent (40%) tax on the excess.
The Federal Estate Tax is an excise tax imposed on the transfer of property from a decedent and is based on the net sum of the decedent's estate, that is, the gross estate value less allowable deductions and adjusted for taxable gifts made after 12/31/1976. The Federal Estate Tax return when required, must be filed within nine months of the decedent's death or an extension must be requested to avoid a serious penalty of five (5%) percent per month. Interest in the amount due is changed and calculated from the beginning of the tenth month after death.
Estate Exemption Per Person and Estate Tax
Calendar Year Exemption GST Exemption Estate Tax
2011* $5,000,000.00 $5,000,000.00 35%
2012* $5,120,000.00 $5,120,000.00 35%
2013* $5,250,000.00 $5,250,000.00 40%
2014 $5,340,000.00 $5,340,000.00 40%
2015 $5,430,000.00 $5,430,000.00 40%
2016 $5,450,000.00 $5,450,000.00 40%
2017 $5,490,000.00 $5,490,000.00 40%
2018 $11,180,000.00 $11,180,000.00 40%
2019 $11,400,000.00 $11,400,000.00 40%
2020 $11,800,000.00 $11,580,000.00 40%
*Special Portable Application - The Estate Tax Exemptions are portable so that when one spouse dies the unused amount can go to the surviving spouse for use at his or her death. The exemptions are now subject to adjustment each year for inflation.
Gift Tax Annual Exclusions and Special Considerations
1) Annual Gift Exclusion per Donee ($15,000.00)
Each individual donor may give any number of recipient donees a tax-free gift of $15,000.00 for the year 2020. The annual exclusion for the years 2009 to 2012 was $13,000.00, for 2013 to 2017 was $14,000.00 and 2018 to 2020 is $15,000.00. Each year a couple may double this amount for each donee. To give away more than the annual exclusion each year is to reduce your Lifetime Estate Tax Exemption by that amount.
2) Unlimited Marital Deduction for Estate Taxes
Generally, the surviving spouse inherits from the decedent spouse free from Estate Taxes.
3) Capital Gains and the Stepped-up Basis for Income Tax
Assets passing because of death receive a new stepped-up basis for capital gains purposes. Furthermore, for all community property the surviving spouse's half interest also receives a new stepped-up basis. In other words, for community property the entire asset is given a new stepped-up basis for capital gains treatment. If it is then liquidated for the new value, there would be no Capital Gain Income and therefore no Capital Gain Income Tax due.
A surviving spouse will inherit all estate assets tax-free. An individual estate below the exemption amount shall pass to any heir tax-free. With proper estate planning a couple would be able to shelter twice the exemption amount, set up a gift giving strategy while they are living, and take full advantage of a projected new basis on all community property to shelter their estate from Estate Taxes and possibly future Income Taxes as well.