MyEstateGuide.com

THE FEDERAL ESTATE TAX is a tax on any transfer of assets from a deceased person's estate to his or her heirs, except for transfers to spouses. Under current law, the federal estate tax will be repealed as of January 1, 2010.

ALL OF THE ASSETS owned by the deceased person are subject to the estate tax, including property in joint tenancy, living trusts, IRAs, and life insurance (if the insurance was owned or controlled by the decedent).

EACH ESTATE HAS AN EXCLUSION from the tax that will increase each year until 2009, when it will be $3,500,000. The exclusion amounts are as follows:

Year of Death	Exemption
2002	$1,000,000
2003	$1,000,000
2004	$1,500,000
2005	$1,500,000
2006	$2,000,000
2007	$2,000,000
2008	$2,000,000
2009	$3,500,000
2010	Repealed
2011	$1,000,000

The maximum rates for the federal estate tax are as follows:

Year of Death	Maximum Tax Rate
2001	55 %
2002	50 %
2003	49 %
2004	48 %
2005	47 %
2006	46 %
2007	45 %
2008	45 %
2009	45 %
2010	0%
2011	55%

THE MARITAL DEDUCTION: Assets that are transferred from one spouse to the other spouse at death are not taxed. This is called the "marital deduction," and there is no limit on how much can be transferred.

THE DISADVANTAGES OF USING THE MARITAL DEDUCTION: Although the marital deduction protects the surviving spouse from federal estate taxes, it may subject the surviving spouse's estate to higher taxes at a later date. Using the marital deduction to transfer all of a spouse's assets to the surviving spouse means that the first spouse to die will not have taken advantage of his or her exclusion amount, and that benefit is no longer available to the couple's estate.

THE FEDERAL GIFT TAX is intended to limit the amount that can be transferred to persons other than a spouse without incurring a tax. Starting Jan. 1, 2006, gifts of up to $12,000 can be made to an individual without incurring a gift tax. If the gift is made by a married couple from their jointly owned assets, it can be as much as $24,000 per year without being taxed. There is a lifetime gift exemption of $1,000,000.  Gifts made prior to Jan. 1, 2006, are subject to former law, which allowed gifts of up to $11,000 per person.

WHAT IS A DISCLAIMER? A disclaimer is a refusal to inherit all or part of an asset or of an entire estate. The reason for doing this is that the person who is entitled to receive a bequest either doesn't need or doesn't want the bequest. In most cases the bequest would only make a sizable estate larger and increase the amount of federal estate taxes that will eventually be collected from that estate. The disclaimer operates as though the disclaimant died before the decedent, and the decedent's estate plan specifies a contingent beneficiary, who is often the disclaimant's children. If that is the case, the effect is that the bequest goes to the disclaimant's children, and is never taxed in the disclaimant's estate.

As an example, assume that the disclaimant has a $5 million estate and receives a $1 million bequest from his or her parents' estate. If the parents' estate plan provides that the bequest will go to the disclaimant's children if he or she does not survive the parents, the disclaimer will allow the $1 million bequest to go directly to the disclaimant's children. If a disclaimer is not used in this situation, the $1 million would stay in the disclaimant's estate, and eventually be taxed at rates currently as high as 46 percent.