The federal estate tax is a tax that is collected on the transfer of a person's assets to his or her loved ones after death. The tax is calculated by adding up the fair market values of all of the decedent's assets on the date of death and then applying estate tax credits and subtracting out allowable estate tax deductions.
Who is Subject to the Federal Estate Tax?
The estate of every U.S. citizen is subject to the federal estate tax, but not every estate will actually have to pay the tax. Why? Because the Internal Revenue Code gives each U.S. citizen a "coupon" that can be applied against their estate tax bill. Currently the "coupon" is $3,500,000. Thus, if the value of your net estate - meaning your gross estate reduced by allowable estate tax credits and deductions - does not exceed $3,500,000, then your estate will pass to your heirs free from federal estate taxes.
And do not forget about state estate taxes and inheritance taxes. Currently 19 jurisdictions collect an estate tax at the state level and the state "coupons" range from $338,333 in Ohio up to $3,500,000 in Delaware and North Carolina:
State Estate Tax Chart Only seven states currently collect a state inheritance tax, with Maryland and New Jersey being the only two states that collect both estate and inheritance taxes: State Inheritance Tax ChartWhat Happens if Your Estate is Taxable?
What happens if your net estate does exceed the $3,500,000 estate tax exemption? Then your estate will have to file a federal estate tax return, called a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, within 9 months of the date of your death. And when is the estate tax payment due? At the same time the Form 706 is due - 9 months after your date of death.
Chart Showing Federal Estate Tax Exemption: 1997 - 2009