What is the Estate Tax Exclusion?

Estate taxes are levied on property left to surviving family members after a loved one is deceased. These taxes can be as high as 46%, which can make many an inheritor wonder if they qualify for an estate tax exclusion. An estate tax exclusion is a condition that allows these taxes to be reduced or eliminated.

Estates are taxed at the same rate as gifts which are taxed at a much higher rate than personal income. The rates move progressively up as the size of the inheritance grows. Those inheriting large family legacies over $2 million US Dollars (USD) are taxed at 46%.

When a person chooses to skip a generation, the estate tax is doubled. For example, if a grandparent bequeaths $2 million USD to a grandchild, the amount is taxed at the regular rate of 46% with another 46% on top of that. The $2 million USD inheritance is then reduced to about $584,000 USD.

For those seeking an estate tax exclusion, Congress has provided some level of relief. An Estate Tax Credit was put in place in 2002 that allows someone to pass on a set amount of money tax free. This credit has been increasing gradually since 2002 until it is fully repealed in 2010. In 2011, the tax rates will return to their 2002 levels. The allowable amount from 2011 on is approximately $1 million USD.

There are tools that those with a large inheritance can use during their lifetime to minimize estate taxes. The Gift Tax Credit can be used while a gift giver is alive. This allows a parent to pass on approximately $12,000 USD annually to each child without either party facing taxes. These gifts can be in cash or property and college tuition can be paid on top of this without counting against that total.

Estates passed between spouses have an estate tax exclusion. This can be a double-edged sword because once the spouse has passed, the money will be passed on to other heirs and taxed. The gifting couple can help reduce these taxes by systematically doling out the inheritance since this exclusion gives additional time to do so.

Charitable donations also have a full estate tax exclusion. For those with a philanthropic heart, some taxes can be cut by leaving a portion or all of an estate to a charity of choice. Many wealthy people choose to leave a percentage of their estate or a set amount of money to their favorite charities.