By Philip J. Ruce, law clerk
Upper Midwest Pension Rights Project

Should you fear the estate tax? If you listen to the news, you might think so. The estate tax is a federal tax on assets transferred after death. When a person dies, that person’s property (his or her “estate”) is distributed to heirs. If this deceased person’s estate is large enough, the estate tax may be imposed on part of it.

Lately, politicians and the media have been giving a lot of attention to the federal estate tax, which has caused many people to wonder what will happen to their property after they die, and what they should do to prevent the government from taking all of their money. Should you deed your house to your children? Should you get all of your money into a trust? Should you flee to the Caribbean and devote the rest of your life to drinking margaritas and establishing tax shelters?

Short answer: “No.” 

For an unmarried person in 2006, the net amount of money and property you must own (called the “exemption amount”) to be eligible to pay estate taxes is $2 million. That means that unless you own a net of more than $2 million in property (your house, investments, bank accounts, etc.), or unless you are in the habit of giving away hundreds of thousands of dollars in gifts, you won’t pay any federal estate tax at all. If you are married, the exemption is $4 million per couple. That’s right - unless you are a multi-millionaire, you won’t pay any federal estate taxes at all. None.

Keep in mind that the number that matters is your net estate. To determine your net estate, add up the value of everything you own and subtract any debts you have. You subtract any of your estate that you plan to give to your spouse or to charity. You then take certain additional deductions according to the tax code. It is this end number that we call your “net estate.” If this number is greater than $2 million for unmarried people or $4 million for married couples, you may have to pay federal estate taxes on the dollar amount that exceeds these exemptions.

Even if you do fall into this wealthiest group, the exemptions are set to increase. By 2009, the exemption amount for unmarried people will be $3.5 million per person, or $7 million per married couple. In 2010, the estate tax will disappear completely. 

After 2011, these increases and elimination of the federal estate tax will “sunset.” unless Congress votes to extend the repeal of the estate tax, the exemption amount  will fall back to $1 million for unmarried people and $2 million for married couples. But remember this - in 2001, when the exemption amounts were $1 million and $2 million, more than half of all the estate taxes paid in the United States were paid by only 3,502 people, all of whom had net estates larger than $5 million. In fact, only the wealthiest 0.27 percent paid any federal estate tax at all. That means less than one-third of one percent had to pay even one dime of federal estate tax, even when the exemption amounts were lower. 

In 2003, the estate tax is estimated to have raised $20 billion. If we eliminated the estate tax completely, the burden of making up this dollar amount will have to be spread out among all American households - including, presumably, yours.

So, we have only the wealthiest people paying this tax and the tax is disappearing altogether in 2010. It is not until 2011 that there is even a risk of tax coming back to haunt us. Does this mean that you should not worry about it at all?

Not so fast. The importance and value of a sound and well-planned estate cannot be underestimated. A qualified estate attorney can help you to avoid many expenses, regardless of how wealthy you are (or aren’t). Also, there is another estate tax issue, but one much less onerous - Minnesota’s estate tax. The state estate tax applies to net estates larger than $1 million for unmarried persons and $2 million for married couples. Less than 2 percent of Minnesota estates pay this tax. 

Bottom line: You likely do not have to worry about the estate tax, but it’s a good idea to consider estate planning. If you still insist on fleeing to the Caribbean, go easy on the margaritas.