Federal Estate Tax.  There is a separate federal estate and gift (and generation-skipping transfer) tax system that taxes everything you own at your death.  This includes life insurance, jointly held property, retirement benefits, annuities, personal property, real estate (yes, even the kitchen sink) and more. Added to this amount is all lifetime gifts that exceeded the annual exclusion (currently $13,000 per year per beneficiary), for which a gift tax return was or should have been filed.  This is your "gross estate".

Exemption Amount.  If your gross estate exceeds the exemption amount then a Federal Estate Tax Return must be filed within 9 months after death.  The current exemption amount for 2009 decedents is $3,500,000.  Under current law,, the Federal Estate Tax is entirely repealed in 2010, but reappears in 2011 with only a $1,000,000 exemption.  The current law in place is the 2001 tax act (read our summary of the act).  The exemption amount is a political football and is subject to change at any time.  But, keep in mind that the estate tax is set up to penalize procrastination and inaction.

Deductions and Credits.  Even if your gross estate exceeds the exemption equivalent, various deductions and credits may reduce the value of your "taxable estate" to below the exemption amount resulting in no tax being due. Deductions include funeral expenses, decedent's debts and administration expenses (e.g. attorney's and executor's fees).  There are a variety of credits, most important among them is the unlimited marital deduction. This means that qualified transfers to (U.S. citizen) surviving spouses are not be subject to estate taxation.

Click here for how the unlimited marital deduction can be a double-edged sword and why estate tax planning is particularly important for married couples whose combined estates exceed the exemption amount.

A few estate tax online estate tax calculators* to help determine exposure:

        Charles Schwab's calculator

        Fidelity's calculator

        SmartMoney magazine's calculator

*These calculators are linked for convenience only and should not be used as a substitute for consulting with a qualified estate planning attorney to determine your estate tax exposure and planning options.

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Disclaimer:  All content provided is brief general information and not intended as legal advice.  Always consult an attorney before acting.  Please read full disclaimer at the bottom of the page.