What is the "death tax"?

The “death tax” or estate tax as it is more appropriately called, has been apart of American society since 1916, when the federal government began taxing estates in order to prevent the concentration of wealth within families. The tax is levied on estates that exceed a certain value. It is important to note that there is the federal estate tax, and in some instances there is a state estate tax as well (Wisconsin’s estate tax ended on 12-31-07, however, it may return in the future).

Technically, the tax is assessed on an estate upon death if the estate’s value exceeds a certain threshold. As a result, the estate will pay the tax, reducing the amount your heirs inherit. However, not every estate pays the tax. If your estate is below a certain amount, it is considered “exempt”, and no tax is owed. In 2001 Congress passed a law causing the exemption amount to change over time: in 2003 the exemption amount was $1 million, it increased to $1.5 million in 2004 and 2005, and increased again in 2006 through 2008 to $2 million, in 2009 it will be $3.5 million, then in 2010 there will be no tax, and in 2011 the exemption limit will return at $1 million.

The value of your estate is essentially all of your assets minus your liabilities. However, you must remember to include the value of life insurance you owned as a liability. For many young families, carrying significant life insurance can raise the need to plan for estate taxes. If you find yourself in the area where possible estate taxes may apply, it is wise to speak with an estate planning attorney about tax planning strategies, including: A-B spousal trusts, gifting, and charitable giving.