Estate tax is a federal tax imposed on the transfer of property by will or by intestate succession (the transfer of property when a person dies without a will, as provided by state law). It consists of an accounting of everything you own or have certain interests in at the date of death. See Internal Revenue Service (IRS) Form 706.
The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all these items is your "Gross Estate." The includible property may consist of cash, securities (stocks, bonds), real estate, insurance, trusts, annuities, business interests, and other assets.
Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit for gifts and estate tax exemptions.
The estate tax only applies to the portion of the estate’s value that exceeds an exemption level—which is $11.18 million for singles and $22.36 million for married couples (for years 2018 through 2025). The exemption is indexed for inflation and the top tax rate is 40%.
Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding:
• $1,500,000 in 2004 - 2005;
• $2,000,000 in 2006-2008;
• $3,500,000 for decedents dying in 2009;
• $5,000,000 or more for decedent's dying in 2010 and 2011 (there are special rules for decedents dying in 2010);
• $5,120,000 in 2012;
• $5,250,000 in 2013;
• $5,340,000 in 2014;
• $5,430,000 in 2015;
• $5,450,000 in 2016;
• $5,490,000 in 2017;
• $11,180,000 in 2018;
• $11,400,000 in 2019;
• $11,580,000 in 2020; and
• $11,700,000 in 2021.
Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse. This election is made on a timely filed estate tax return for the decedent with a surviving spouse. Note that simplified valuation provisions apply for those estates without a filing requirement absent the portability election.
In Texas, as in all states, the estate tax is governed by federal law, not state law, since Texas does not impose its own estate tax. The federal estate tax applies to the transfer of property at death. The value of the estate is determined by the fair market value of the decedent's assets at the time of death, which may include cash, securities, real estate, insurance, trusts, annuities, business interests, and other assets. Deductions are allowed for debts, administration expenses, property passed to surviving spouses, and charities, among others. The taxable estate is then calculated, and lifetime taxable gifts made since 1977 are added to this amount to determine the estate tax owed. The tax is reduced by any applicable credits, including the unified credit. For 2018 through 2025, the federal estate tax exemption amounts are $11.18 million for individuals and $22.36 million for married couples, with a top tax rate of 40%. Estates that do not exceed these exemption amounts generally do not need to file an estate tax return, unless they are making a portability election to transfer any unused exemption to a surviving spouse. The exemption amounts are indexed for inflation and have varied in previous years. The requirement to file an estate tax return depends on the size of the estate and the year of death, with different thresholds applying from 2004 to 2021.
