The estate tax is a tax on your right to transfer property at your death. This hefty tax can have devastating effects on your estate. At your death, your estate may have to pay up to 55% of the value of your assets to the government. Many times your heirs will have to sell your assets just to be able to cover the amount of estate tax owed.
The estate tax is assessed on the overall fair market value (not necessarily what you paid for things or what their values were when you acquired them) of your “Gross Estate.” Your Gross Estate includes pretty much everything you own at the date of death, including cash and securities, real estate, insurance policies, trusts, annuities, business interests, and all other assets. Note: the size of the probate estate has nothing to do with the size of the federal taxable estate.
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. After the net amount is computed, the tax is then assessed at the highest possible bracket.
The estate tax is then reduced by the available “Unified Credit.” The difference consists of the amount of estate tax you owe.
Note: The amount of available Unified Credit changes from year to year. It is impossible to predict how much the Unified Credit will be in a given year. Below is a list of Unified Credits for the last ten years.