Federal Estate Taxes

The “estate tax” is a special tax on property left by a deceased person. There are separate federal and state estate taxes, but most state death taxes, including California’s, can be claimed as a credit against the federal tax. The overall tax rate thus remains uniform in most states. However, some states, including a few “retirement states” like Florida, retain inheritance taxes that are owed on estates that are not subject to federal estate taxes.

$2 million Exemption Equivalent: Technically, the estate tax is imposed on all estates, but each taxpayer has a huge tax credit which corresponds to the tax on an estate of $2 million (as of 2006). The practical result is that there is no estate tax if a deceased person leaves less than $2 million worth of property.

No Estate Tax for Bequests to Spouse or Charity: There is no estate tax on any property left to a surviving spouse or to a qualified charity. Wealthy married persons can leave $2 million to their children and the balance of their estates to a surviving spouse (or charity), completely avoiding any estate taxes.

Property left to a surviving spouse will be subject to estate taxes at the time of the survivor’s death, if it is not left to charity (or to a new surviving spouse).

Forbes magazine wrote in October 1993 that Warren Buffett was then the richest man in America, with more than $8 billion in assets. According to Forbes, Buffett and his wife plan to leave their entire estate to private charitable foundations after they die – avoiding $4.4 billion in estate taxes.

Tax Rates: The estate tax is computed based upon the total value of all property transferred due to the deceased person’s death (excluding bequests to a surviving spouse or to charity). The table at right reflects the approximate federal estate taxes payable by California residents. Estate taxes can be higher if your state imposes a state inheritance tax.

For decedents dying in 2006, the estate tax rate is 45% on amounts above $2 million.