A question that comes up frequently is whether tax is really due when you die. The answer of course, as is commonly the case if you deal with attorneys on a regular basis, is it depends.
There is a federal estate tax in the Unites States which is imposed upon the assets that a person owns when they die. Of course this is subject to several caveats which may exempt someone from tax.
Transfers of anything owned at the time of death to a spouse are completely free of tax. This is called the marital deduction and ensures that married couples can continue to enjoy their assets and lives they way they have become accustomed until the second spouse passes.
If an individual does not leave a living spouse when they die, the estate may be subject to tax if it reaches a minimum threshold. The current rules in 2011 exclude the first $5 million from any taxes and in the case of married couples, some simple tax planning allows spouses to take advantage of each exclusion for a total of $10 million tax free. Any additional assets beyond $10 million would be subject to the current estate tax rate of 35%.
While this can sound like a lot, take into consideration that this actually means only about 3,500 people who die in 2011 will have estate tax bills. That is 0.14% of the 2.5 million who die annually in the U.S., and the vast majority of those who have a tax bill have less than $15 million in assets. The tax due for someone with such a $15 million estate would be approximately $1.75 million and therefore the estate tax would effectively levy a tax of 11% on such estate assets.
It should be noted that there are also countless tax planning techniques and additional opportunities offered to reduce certain taxpayer’s burdens. So is there an estate tax (or death tax) in the U.S.? Yes, but 99% of us won’t be affected by it, and even 86% of the final wealthiest 1% will escape tax free.
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