ESTATE TAX: SUMMARY
The estate tax is imposed on the privilege of transferring property by will, or through an estate without a will or by operation of law. The maximum estate tax rate is 40% after 2012 and applicable exclusion amount is $5 million indexed for inflation after 2011($5,120,000 for 2012 and $5,250,000 for 2013). The tax is payable by the executor or administrator even if some of the assets upon which the tax is generated are not under his or her control. If no executor or administrator is appointed, the tax falls on the person(s) in possession of the property(the decedent’s property) This tax differs from Pennsylvania inheritance tax, which is imposed directly upon the person receiving the property. If the estate tax is not paid when due, the executor or administrator is responsible, the property is subject to lien and the person receiving the property(the legatee, devisee and/or person in possession of the property) is liable for the tax, penalties and interest thereon as well. The estate tax is due with the filing of the return within 9 months after the date of death. A 6 month extension is available. A return is required even if no tax is due, if the gross estate exceeds the applicable exemption of $5 million adjusted for inflation after 2011(the exemption equivalent).
For a single person, the critical amount is the exemption equivalent. For a married couple, there need be no tax at all for the first to die, regardless of the size of the estate, because the marital deduction is unlimited. After the death of a spouse, the surviving spouse may use any remaining unused exemption equivalent left over from the state of the first spouse to die, so long as this election is made on a timely filed estate tax return for the first spouse to die. This allows for a double exemption for married persons so that $ ten million can be passed without estate tax. The most common technique for preserving this double exemption is to create a trust in the amount of the exemption equivalent with income to spouse and remainder to children. This trust, called a “bypass” or “credit shelter” trust, is not subject to tax. Therefore, when the second spouse dies, the entire value of the trust, including any increase over the original amount of the trust assets, passes tax free.
Both U.S. citizens and residents are subject to the estate tax. Special provisions apply where one spouse is not a citizen.