What Is The Estate Tax And Will It Ever Go Away?

The Estate Tax is the tax that the government puts on the assets that are transferred to your beneficiaries when you die. Taxable assets may include real estate, stocks, money in a bank account, and other valuable belongings. It does not look like the estate tax will permanently go away. However, with careful planning, you could reduce your estate tax significantly.

In the United States, people have been planning their estates in accordance with the Economic Growth and Tax Relief Act since 2001.  This Act is important for the reason that it changed 441 tax laws and was the biggest estate tax reduction in 20 years.  Here is an overview of what the Act covers: 

Lower Tax Rate 

The Act lowers the tax rate on the following taxes: 

1) The marginal estate tax; the tax levied on your estate when you die.  Note: This tax can be a burden on heirs if you die and leave behind assets for them, but no monetary funds to cover the tax on that asset.  For instance, if you leave behind a home, the government may tax up to 55% of its value.  Your heirs will have to find a way to pay those taxes if he or she would like to keep the house.  The Act's lower tax rate can help reduce the amount of taxes on assets like your home.  This way, your heirs are not overburdened or forced to quickly sell the asset at a low price in order to obtain funds to pay taxes. 

2) The generation skipping transfer tax (abbreviated GST); the tax break given to you if you are transferring assets to a grandchild or great-grandchild. 

3) The gift tax; the tax imposed on assets that are given away as gifts before you die. 

Increased Asset Transfers  

The Act increases the amount of assets that can be transferred at death without the estate or generation-skipping tax. 

Temporary Tax Repeal 

In 2010, the generation skipping tax was repealed.  With this repeal, grandparents are able to gift portions of their assets directly to their grandchildren and great grandchildren without having to lose a portion of those assets to taxes. 

For the year 2010, the estate tax was also repealed for one year.  If you died in the year 2010, you could give your complete estate to your heirs without needing to worry about paying any taxes.  However, if you died in 2011, only $1 million was eligible to be passed on to your heirs without being taxed. 

Since the estate tax will not be permanently repealed within the foreseeable future, it is essential that you plan your estate so that your desires could be carried out in the most efficient way, regardless of the year of your death. 

Understanding the complicated tax system can be a challenge for somebody who is not versed in tax law.  If you're planning our estate protection and distribution, it is recommended that you meet with an attorney.  Your attorney could walk you through the steps had to make sure that your heirs obtain as much of your assets as possible.