How do I know if I owe federal estate tax?

In situations when the insured decedent has had any ownership interest in the policy at the time of death and unless the insured has made an absolute assignment of the policy at least three years prior to death, the whole amount of the proceeds is included in the gross estate of the insured, which is then subject to taxation.

How to Calculate Your Federal Estate Tax

To do that, you can either contact a qualified estate planner, or do it yourself - it only requires simple personal accounting skills. Here is how you can go about computing your estate tax, step by step:

1. Add up everything that you own or have certain interest in at the time of death to arrive at your gross estate. This is a list of the property you can include, as suggested by the Internal Revenue Service (IRS):
   • home or real estate;
   • cash and securities;
   • life insurance proceeds and other types of insurance;
   • business interests - stocks, mutual funds;
   • other assets.
2. Subtract all your expenses, such as:
   • funeral and administrative expenses;
   • mortgages, loans and credit card debt;
   • charitable deductions;
   • gift taxes paid on taxable gifts after 1976.

If you net estate is positive, you can then further reduce it by the marital deduction.

The available unified credit is then subtracted from the taxable estate.

Are There Any Exemptions?

The good news is that according to current tax regulation, only the richest two percent of all Americans will have to pay estate tax. The amount of property exempt from estate tax has been increasing and in 2009 it is $3,500,000 (see Table 1). In keeping with the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax will be canceled altogether for only for the year 2010, unless Congress votes to make its repeal permanent.

Table 1.Maximum exemption amount schedule.

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