You may have heard that you do not owe federal estate tax unless your estate is worth more than $5,000,000, but do you really know what this means?
Computing whether you owe federal estate taxes can be a complicated endeavor and you should work with an estate planning attorney if you are unsure; however, the following provides a summary on determining when you might owe federal estate taxes.
Generally, the federal estate tax is a tax on your right to transfer property at death. It accounts for everything you own at death (your Gross Estate) and determines the fair market value of these things at that time (the value of the estate at death, not what you paid for the assets). For example, your estate can consist of cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets.
After you determine your Gross Estate, you are allowed to take certain deductions to arrive at your Taxable Estate. Allowable deductions can include mortgages and other debts, estate administration expenses, property that passes to surviving spouses, and qualified charities.
Only after you arrive at your Taxable Estate can you determine if you owe estate taxes. As mentioned above, the personal exemption amount in 2011 is $5,000,000, so you will usually not owe federal estate tax if your taxable estate is less than this amount.
Though keep in mind that in some cases lifetime taxable gifts and other amounts may be added to the Taxable Estate to make that number higher.
Determining whether you owe federal estate taxes can be complicated. While we have provided a rough outline to determine if you owe estate taxes, you should contact an estate planning attorney if you own complex assets or to learn about state estate tax liability.