Estate Tax

Estate Tax, in law, federal and state taxes imposed upon the property (called the estate) of persons after their death. Estate taxes are usually imposed on the net estate of a decedent. The net estate represents the value of the property at the time of death, less allowable deductions as provided by law. In United States law and in the laws of some states, the value of the decedent's insurance policies is not deductible and is included in the estate. Gifts of real or personal property, made by a testator in contemplation of death, are considered under federal and most state estate tax laws as part of the decedent's estate.

Beginning in 1982, changes in the U.S. federal tax law allowed an unlimited marital deduction—that is, an estate of any size can be left tax free to a spouse. In computing the federal tax on a decedent's estate after taking the marital deduction into account, the Economic Growth and Tax Relief Reconciliation Act of 2001 gradually raised the amount that could be exempted from federal estate taxes and completely eliminated the estate tax in the year 2010. However, the law was due to be repealed after December 31, 2010. Federal estate taxes would then revert back to the way estate tax law existed in 2001 unless Congress agreed to extend the Tax Relief Reconciliation Act. In 2001, $675,000 could be exempted from estate taxes. Under the new tax law that exemption was raised to $1 million in 2002 and 2003, $1.5 million in 2004 and 2005, $2 million from 2006 through 2008, $3.5 million in 2009, and no estate tax at all in the year 2010. In addition, the top estate tax rate on amounts exceeding the exemption was to decline from 50 percent in 2002 to 45 percent in 2009. Many observers believed that if federal budget deficits continued to grow, Congress was likely to repeal these estate tax provisions, which benefited only about 2 percent of the wealthiest Americans.