The Estate Tax is a tax on the right to transfer property at the time of death. In other words, when someone in your family passes away and leaves property to you, the federal government levies an estate tax on the value of that property. This tax does not apply when a person leaves an asset to his or her surviving spouse, as there is an unlimited marital deduction.
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To determine the value of the estate, everything that an individual owns or has an interest in is accounted for at the date of death. This property may include cash and securities, insurance, annuities, trusts, real estate, business interests, and other assets. The value of this property is then calculated using the fair market value, which is not necessarily what was paid for the property or what the value was when acquired. The total value of these items is called the Gross Estate.
After one has calculated the value of the Gross Estate, there are certain deductions that are allowed when determining the Taxable Estate. These can include mortgages and other debts, estate administration expenses, and property that is being passed on to surviving spouses or qualified charities. Once the taxable estate has been calculated, the value of any taxable gifts made since 1977 is added to the value if they exceed certain annual limitations. In the end, you only pay taxes on transfers that exceed the unified credit amount, which is determined by tax laws.
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