Who is Subject to the Estate Tax?

The federal estate tax applies to the transfer of property upon death. The estate of a person who dies, the decedent, is liable for a tax based upon the value of the decedent’s taxable estate if the size of the estate presently exceeds $625,000. However, the beneficiaries of the estate are required to pay the tax if the estate does not pay it when due. Each beneficiary’s liability is limited to the value of the part of the estate he or she receives.

States impose an inheritance tax, an estate tax, or both. Unlike an estate tax, an inheritance tax is a tax imposed against a beneficiary inheriting property. The amount of the tax is normally based upon the familial relationship between the decedent and the beneficiary and the value of the inheritance.

The estate tax imposed by states is normally quite similar to the federal estate tax except that:

  • the rates are lower
  • a state estate tax is only imposed on property connected with the taxing state

A decedent’s status on the date of death as a U.S. citizen or resident, or as a non-resident non-citizen, determines:

  • what property is included in the estate
  • the requirements for filing a return
  • the form which must be filed

If a person is a citizen or resident of the United States at the time of death, the value of their entire estate is subject to estate tax. This rule applies regardless of whether the individual’s property is located in the United States or abroad. For estate tax purposes, a resident is someone who was domiciled in the United States at the time of death. A person acquires a domicile in a place by living there, for even a brief period of time, with no present intention of moving from that place.

For a non-resident who is not a citizen of the United States, only the value of their property that is located in the United States at the time of death is subject to the estate tax. Certain U.S. citizens who expatriated within 10 years of death are subject to estate tax on property located in the United States and on certain foreign corporation stock.

Filing the Estate Tax Return

The executor of an estate of a U.S. citizen or resident who dies in 1998 must file an estate tax return if the sum of the taxable gifts during lifetime, plus the gross estate at the date of death, exceeds $625,000. This threshold increases annually through the year 2006, when the amount reaches $1,000,000. See Gift Tax for the phase-in amounts for the interim years.

If a return is required, Form 706, United States Estate and Generation-Skipping Transfer Tax Return must be filed within nine months after the date of death. The executor or other individual required to file the return may apply for a six-month extension of time to file.

What Property is Taxed?

All property owned by a decedent at death is part of the gross estate and potentially subject to tax. The gross estate includes:

  • property owned by a decedent at the time of death
  • property transferred at death by a will or by intestacy laws

The gross estate may also include:

  • Other property interests that the decedent did not own at death. The gross estate does not include property that the decedent owned at death that could not be transferred by a will or by the intestacy laws, such as a life estate created by another.
  • The value of property transferred by a decedent if that person kept possession or enjoyment of the property, or reserved certain rights or interests in the property. This includes the right to income from the property for life, or for a period that does not in fact end before death, or that cannot be determined without reference to the decedent’s death.
  • The proceeds of a life insurance policy are included in the gross estate if the policy was given away within the three-year period prior to death. If a decedent assigns all rights under an insurance policy to another person more than three years before death, the proceeds are not included in the gross estate.

How is the Tax Calculated?

The gross estate is reduced by five major deductions:

  • funeral and administrative expenses
  • the decedent’s debts
  • casualty and theft losses
  • certain transfers to a spouse
  • certain transfers to charity

The gross estate, less the allowable deductions, produces a taxable estate. A tentative tax is calculated by applying the gift and estate tax rates to the sum of:

  • the taxable estate
  • the taxable gifts made during lifetime

This tentative tax is then reduced by any tax paid during lifetime and by a number of credits. The most important credit is the unified credit. See Gift Tax. The estate is also entitled to a credit for the payment of state death taxes. This credit is limited based upon the value of the property subject to state death tax.