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| LegalBits | September 2004 |
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ESTATE TAX PRIMER This article is the beginning of what will be many parts discussing the estate tax. Many of you probably are aware of the estate tax, commonly called the "death tax" imposed on transfers of decedents' property in this country. I am sure most of you have not had to deal with it, however, because the tax does not begin to run on property until the value of the estate reaches an uncommonly high level. For this reason, and as an effort to commit my first day of class into memory, we will discuss the very basics of the estate tax. The estate tax is an excise tax, or a tax on some behavior or event, not really a tax on the property itself. In the case of estates, however, a tax on the transfer, the "behavior," is practically a tax on the property itself, because deceased persons cannot legally hold property, making a transfer absolutely necessary. This fine distinction, a tax on behavior, is a material one, as Congress may not tax property directly constitutionally without some method of apportionment. Maybe I'll go into that in more detail another day. Be that as it may, Congress taxes the transfer of a "taxable estate" in 26 U.S.C. § 2001(a) (2004). It is to be paid by the executor of the estate out of the estate's assets, so the heirs feel the burden of the tax. 26 U.S.C. § 2002. We'll get into what a "taxable estate" is soon enough, but this month's focus is merely on the taxable estate is large enough to matter. I feel that because many of you will never inherit an estate as large as is required to be subject to the estate tax, this will be all you need to know. If you read the Internal Revenue Code (which pleasure reading I have never recommended to anyone) the tax is calculated first, and the taxpayer then credits against the tax some Unified Credit. See 26 U.S.C. §§ 2001, 2010. If the Unified Credit, which is similar to the standard deduction you claim on your income tax form, is greater than your tax liability, then the executor need not pay any tax. The amount of the Unified Credit is under great flux due to recent tax changes. To demonstrate how complicated negotiating tax reform is, I will simply recreate the Unified Credit table from 26 U.S.C. § 2010(c).
This table demonstrates two things, first, that dying in 2009 is better for tax purposes than dying in 2002 (not to mention other reasons), but it also shows how many dollars one can shield from the estate tax. These numbers all seem very high, but when one considers that all existing 401(k)'s, pension plans, life insurance policies, and real estate that passes from a decedent to his heirs will be included, one can be subject to the estate tax rather easily. This concludes our primer on when the estate tax applies, and who has to pay it. If you never have to deal with an estate as large as $1 Million dollars, you never have to worry, so for you, we're done. For the rest of you, be prepared for articles in the future, because as we will see, the stakes can be very high (the estate tax is progressive and the highest bracket is around 50%)…---------------------- |
