Estate Tax FAQs

Frequently Asked Questions (FAQs) about the Estate Tax

What is the estate tax?

The federal estate tax is a tax on the transfer of assets at death. When someone dies, his or her assets (the person’s estate) are distributed to heirs. If the total value of the estate is large enough, an estate tax is imposed before the remaining assets are distributed.

How large must an estate be to be taxed? 


Currently, the net value of an individual's estate must exceed the basic exemption of $2 million. Couples can exempt $4 million. This exemption level will gradually rise to $3.5 million for an individual ($7 million for a couple) by 2009. Small businesses and farms have long enjoyed additional protections.

What is the effective estate tax rate?


For the 2008 tax year, the top estate tax rate is 45%. However, after the $2 million basic exemption and other deductions are applied, the average effective estate tax rate — the percentage of the total estate actually paid in taxes — works out to be much lower. In 2001, when the top rate was 55%, the average effective estate tax rate was only 19%. Today, with a lower top rate and a higher exemption, the average effective tax rate would be even lower.

What are the actual estate tax rates?


Here are the current rates. Remember that the "taxable estate" is the estate left after all bequests to a spouse or to charity are deducted. An estate passes completely tax-free to a spouse, along with the decedent's exemption.

Who pays the estate tax? 


Currently, the wealthiest 0.27% of Americans are the only ones who pay estate taxes. In 2001, over half of all estate taxes were paid by 3,502 people with estates larger than $5 million — representing the top 0.14% of all Americans.

How much does the estate tax raise every year?


In 2003, the estate tax is estimated to have raised $20 billion. Several cabinet departments — including Labor, Commerce, Agriculture, and Interior — each have discretionary budgets equal to or smaller than $20 billion.

If no changes are made, what will happen to the estate tax?


Under current law, the estate tax will be gradually phased out until the year 2010, when it will disappear entirely. Then, in 2011, the estate tax repeal “sunsets,” which means that the estate tax comes back into force, with the same $1 million exemption and 55% top rate it had in 2001. This convoluted “sunset” process was set up to artificially limit the total cost of the estate tax repeal. Pro-repeal forces assumed they could come back and permanently repeal the estate tax later, which is exactly what they have tried to do each year. Fortunately, supporters of estate tax reform rallied to defeat repeal.

What do Americans think about repealing the estate tax?


They’re against it. A Jan. 2006 poll of 1,026 adults 18 and over found that 71 percent of respondents were "concerned" or "very concerned" about the current federal deficit. 69% viewed keeping the estate tax on estates over $2 million as the best of eight possible ways to reduce the deficit.

A 2005 poll found that when voters hear all the facts about the estate tax, 69% favor reform and only 22% favor repeal. This includes 64% of Republicans, 72% of Independents, and 66% who own a farm or business. Americans would prefer to spend the revenue on other priorities rather than repealing the estate tax. 73% prefer to spend the money on Social Security solvency; 67% prefer spending the money on K-12 education; and 56% prefer spending the money on homeland security (AARP).

Why is it important to reform, rather than repeal, the estate tax?


If we repeal the estate tax, the burden of paying for public services will shift to low- and middle-income taxpayers. States will have to enact their own estate tax legislation, which will vary from state to state, making estate planning difficult. Giant new tax loopholes will appear, permitting the very wealthy to avoid capital gains taxes and other taxes they now pay. Overall, repealing rather than reforming the estate tax will further concentrate economic and political power in the hands of the richest 0.1% of American families.

How might we reform the estate tax?


We could set the basic exemption at $2 million ($4 million for couples). This reform would exempt about 99.7% of the households in the US. Proposals like this have been offered in Congress since 2000. But the all-or-nothing repeal lobby has typically voted to completely oppose such reforms, preferring to hold those with fewer millions, family farmers, and small businesses hostage in order to win complete repeal for their ultra-wealthy patrons.

With Democrats in control of the 110th Congress, full repeal is less likely. There is, however, danger of “virtual” repeal, which would gut the estate tax by raising the exemptions and lowering the tax rates substantially. The cost of virtual repeal would be close to the cost of full repeal—over $1 trillion in the first ten years.