Overview Of Inheritance And Estate Taxes
Overview of Estate and Inheritance Tax Law.
Under current law U.S. citizens and residents must pay
taxes to the federal government on transfer of property
both during life and at death. These taxes are due under
three separate tax systems: the estate tax, the
generation-skipping transfer tax and the gift tax.
Currently the top tax rate for all three taxes is 35%. The
estate, gift and generation-skipping transfer taxes have a
5 million dollar exemption for individuals (10 million for
couples) during the tax years 2011 and 2012. The estate
tax exemption is “portable” which means that when one
spouse dies the unused amount goes to the surviving spouse
and can be used at his or her death.
Currently, each individual can make an absolutely tax-free
gift of $13,000.00 per donee ($26,000.00 for married
couples) per year. If an individual or couple gives a gift
exceeding the $13,000.00 ($26,000.00) annual exclusion
amount, then it becomes a taxable gift. To the extent that
such a gift is taxable, it reduces the 5 million dollar
exemption amount from the estate tax. For example, if an
individual makes a 1 million dollar taxable gift in 2011
and dies in 2012 with an estate valued at 5 million
dollars, the 5 million dollar exemption amount is reduced
by 1 million reflecting the 1 million dollar taxable gift
to 4 million. That means that 1 million of the 5 million
dollar estate is taxable.
The foregoing information regarding federal gift, estate
and generation-skipping transfer taxes applies only for
the years 2011 and 2012. If Congress does not modify the
tax code before 2013, the gift, estate and
generation-skipping transfer taxes revert back to their
status in 2001 which included only a 1 million dollar
lifetime exclusion amount.
Oregon law allows each individual a 1 million dollar
exemption as contrasted with the 5 million dollar personal
exemption for federal estate tax purposes. This means that
any individual who has an estate exceeding 1 million
dollars is vulnerable to Oregon inheritance tax even
though they would be federal tax-free.
There are certain terms used in the estate tax area which
may be helpful in understanding how estate and inheritance
Historically, using the marital deduction and some
form of credit shelter trust were the most common
techniques for reducing or eliminating estate taxes.
- Marital Deduction. The unlimited amount of assets
that can be transferred from one spouse to another
during life or at the death of the first spouse
without incurring any gift or estate tax cost.
- Unified Credit (Exemption). Currently, federal tax
law allows each individual to pass up to 5 million
dollars tax-free. Oregon only allows 1 million dollars
to pass tax free.
- Bypass Trust (aka Credit Shelter Trust). A trust
designed not to qualify for the unlimited marital
deduction. This trust allows spouses to use their
exemption amounts; in other words, 10 million dollars
for federal purposes and 2 million dollars for Oregon
Article Written By: Carl F. Jepsen, Warren Allen LLP