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What Can DCU Save You?

Estate Taxes

StreetWise Consumer Education Program

Retirement
  • Summary
  • Article

Many people worry that their estate will be subject to estate taxes. The fact is only about 2% of all estates are subject to federal estate tax. Some states also have an estate tax. A few states have an inheritance tax. This section provides an overview of estate and inheritance taxes.

Federal Estate Taxes

The federal tax code contains several exemptions and deductions that allow large amounts of property to be transferred free of estate taxes.

  • The personal estate tax exemption

    The personal estate tax exemption allows a specific dollar amount of property to be passed on tax free. It doesn't matter who inherits it. This exemption was $2 million for 2008, and increased to $3.5 million for 2009. Currently, the estate tax is repealed in 2010 but returns in 2011 with a $1 million exemption.

  • The marital deduction

    The marital deduction exempts all property left to a surviving spouse from estate tax. The exception is if the spouse is not a U.S. citizen.

  • The charitable deduction

    The charitable deduction exempts all property left to a tax-exempt charity from estate tax.

If your estate could be $1 million or more, you should consider estate tax planning. You should also watch for changes to estate tax laws that may affect you.

State Estate Taxes

Many states charge estate taxes. The size of the estate subject to the tax varies from state to state. Check with your state tax or revenue agency for details.

State Inheritance Taxes

A few states have an inheritance tax which is imposed on the beneficiaries of the estate (the people who receive the property) not the estate itself. Currently Connecticut, Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania, and Tennessee charge inheritance taxes. For more information, check with the state tax or revenue agency where your beneficiaries reside.

Income in Respect of Decedent

When planning, you don't want to overlook one category of assets. This category includes assets such as IRAs, untaxed contributions and earnings in retirement accounts, unpaid commissions, bonuses, stock options, and any other income that would have been taxable to the deceased.

This is called "income in respect of the decedent" and is also referred to as IRD. The beneficiary of an IRD asset must pay income tax when they receive the IRD income. Depending on the amount of the asset and the tax bracket of the recipient, the tax bite could be substantial. An estate planning professional should be able to help you identify those assets that could become IRD and help you plan appropriately.