At the time of death, a federal estate tax is imposed on property transferred by a decedent. This tax is imposed on the transfer of wealth. The measure of the amount of tax is the net value of those property rights which are transferred.
Property transferred at death includes the property which the decendent directly owns at the time of their death. This might include, for example, the family residence, stocks, bonds and bank certificates of deposit which are in their name. Also included are items of personal property such as household furnishings and jewelry. However, property that is not owned directly at the time of death may also be subject to tax for federal estate tax purposes.
The purpose of the federal estate tax is to impose tax on the transfer of wealth at death, without regard to how that property transfer is accomplished. For example, if you or your sister will succeed to property ownership at the time of your mother's death by reason of the property being held as joint tenants with the right of survivorship, and the decedent purchased that property, the estate tax will apply. Similarly, if your mother holds "incidents of ownership" (for example, the right to designate the beneficiary) of an insurance policy on her life, the proceeds will be includible in her gross estate. Also includible will be property that she has previously transferred in trust but over which she has retained certain rights and powers under the trust instrument. Some limited types of property will be included even where she has given up all her rights in property, if the termination of such property rights occurs within three years of death. As you can see, the scope of the estate tax is broad. Careful planning is necessary to assure that these tax traps are avoided.
The estate tax is imposed on a net estate basis. Thus, after identifying all the assets includible in the gross estate, certain deductions are available to offset that gross amount. These include funeral expenses, administration expenses, claims, and other debts and mortgages.
Additionally, in 2005 the first $1,500,000 of assets is protected from estate taxation. This is accomplished through the availability of a "unified credit," also known as the "applicable credit amount." This tax credit is also available during lifetime and, accordingly, may have been partially or completely used during life. If completely used during life, it would not be available to protect assets transferred at death from the application of the federal estate tax. The federal estate tax exemption amount is raised to $2 million in 2006 and increased slowly to $3.5 million in 2009. The estate tax is fully repealed in 2010, but reinstated in 2011
Assets which are not protected from tax by the unified credit (or otherwise) will be taxed at rates ranging up to 55%, which is set to drop in steps to 45% through 2007-2009 A state death or inheritance tax may also be due, but this tax can offset the federal estate tax through the use of a credit.
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