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Estate Tax Calculator

THE GOOD NEWS is it's becoming increasingly less likely that you'll owe estate taxes. That's because Congress has approved a schedule that increases the amount an individual can leave to heirs tax-free to $2 million in 2006-2008 and to $3.5 million in 2009. In 2010, it will supposedly be repealed altogether.

Still, with 401(k) accounts compounding and life insurance death benefits thrown into the pot, it's easier than some think for a working couple to be subject to the estate tax, at least for the next few years. And this tax can be brutal. For every dollar more than $2 million that you leave behind, Uncle Sam will take 45 cents.

Want to know where you stand? Well, plug your assets and liabilities into our Estate Tax Exposure Meter. If it looks like your heirs will be sharing their bequests with Uncle Sam, don't fret. There are plenty of things you can do right now to make sure that the prime beneficiary of your life's hard work isn't the government. In fact, the Meter will make some suggestions that apply to your situation.

Your next step is to read our story You've Gotta Start Somewhere. There you'll learn about bypass and QTIP trusts which can help you and your spouse double the amount you can leave to heirs tax-free. Then, you'll need to brush up on our other estate planning subjects like Gift Taxes and Roth IRAs.

One more thing. Even though the current law calls for complete repeal of the federal estate tax in 2010, believe it when you see it. Estate tax planning remains critically important until the repeal actually occurs — if it ever does. Politicians have been known to change their minds, and future economic and political events could result in backsliding on the promised repeal. The good news is the federal estate tax exemption is scheduled to increase again to $3.5 million in 2009. That increase is as likely as not to stick even if the estate tax is not completely repealed as currently scheduled in 2010.

Taking advantage of the higher exemption amounts and the relatively simple planning strategies explained in this section will prevent any federal estate tax hit in the vast majority of cases. But first, use this calculator to assess how much you would owe right now in the absence of any estate tax reduction moves.

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Note 1: You can avoid estate tax on life insurance proceeds by setting up an irrevocable life insurance trust to own the policies on your life. However, if you transfer an existing policy into a life insurance trust, it is still considered part of your estate until three years have passed. For more details, see Check Your Life Insurance.

Note 2: Please enter the amount of net worth included above that would end up in your spouse's hands. Include both his or her separately owned share of the net worth plus the share that would be inherited from you.

Example 1: Say your total net worth is $3.5 million. Your spouse owns $1.1 million. You own $2.4 million. Of that amount, $2 million goes to your children with the remaining $400,000 going to your spouse. You should enter $1.5 million ($1.1 million + $400,000). This is the amount of net worth your spouse would wind up with if you die.
The unlimited marital deduction enables you to transfer an unlimited amount free of any federal gift or estate taxes to your spouse while you are still alive or at death—provided your spouse is a U.S. citizen. (If not, you can still avoid taxes by taking some further planning steps that are beyond the scope of this article.) You can take advantage of the privilege without using up any of your $1 million gift tax exemption or any of your separate estate tax exemption.
Example 2: You have $3 billion in assets (or $3 million, whatever). You can transfer all or part of that wealth to your spouse—assuming he or she is a U.S. citizen—by gift or via bequest. No federal gift or estate taxes are due, and your federal gift and estate tax exemptions remain intact. So even after any transfers to your spouse, you can still move up to $1 million to other persons (typically your children or grandchildren) by gift or up to $2 million by bequest. No federal gift or estate taxes will be due there either.

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Note 3: While you are alive, you can gift up to $12,000 to an individual recipient each year without owing any federal gift tax or using up any of your $1 million gift tax exemption or any of your separate estate tax exemption. (Prior to 2006, this figure was $11,000; and prior to 2002, it was $10,000.) If you are married, the current annual tax-free gift limit is $24,000 per recipient if you and your spouse make joint gifts. While still alive, you can also give away an unlimited amount as long as the money goes directly to an educational institution for tuition or to a medical service provider to pay for uninsured expenses.

Example: You pay $25,000 directly to a private college to cover your grandchild's tuition (not room and board, books or supplies). This gift doesn't use up any of your $1 million exemption, nor does it preclude you from making an additional tax-free gift under the $12,000 rule. So you could transfer another $12,000 by writing a check to your grandchild for room and board, books, supplies, personal expenses and whatever. If you have two grandchildren, you could do the same for both. Your $1 million gift tax exemption and separate estate tax exemption both remain fully intact.

Note 4:

Planning Suggestion 1: If the calculator shows a tax liability on your spouse's estate, it may be because you have not taken full advantage of both of your $2 million estate-tax exemptions.
Set up a bypass trust arrangement to make sure both you and your spouse make good use of your respective exemptions. Together, the two of you can then pass along up to $4 million free from federal estate tax. See You've Gotta Start Somewhere for further explanation.
Planning Suggestion 2: Another likely explanation for a tax bill on your spouse's estate is "unbalanced estates." Say your estate is well under the $2 million exemption and your spouse's estate is well over the magic number. If you die first, your estate won't owe any tax, but it isn't big enough to take full advantage of your $2 million exemption (even with a bypass trust arrangement). When your spouse dies, his or her $2 million exemption won't be enough to fully shelter against the federal estate tax.
If this is the case, consider transferring assets between you and your spouse to more or less balance your estates. That way, you can each shelter up to $2 million with a bypass trust arrangement. Another possible solution to the "unbalanced estates" dilemma is a QTIP trust arrangement. See You've Gotta Start Somewhere for further explanation.
Planning Suggestion 3: Yet another possible cause of a tax bill on your spouse's estate is when he or she winds up with more cash than is really needed from life insurance death benefits after you die.
If this is the case, consider setting up an irrevocable life insurance trust with your kids as the beneficiaries. The trust then takes over ownership of the "excess" life insurance coverage. That keeps the death benefits out of both your taxable estate and your spouse's taxable estate. When you die, the death benefits are paid to the trust. The trust fund can then be used to finance your children's college educations. Or you can arrange for staggered trust fund payouts when your children reach certain ages (say 30, 40 and 45). Or both. See Check Your Life Insurance for further explanation.
Planning Suggestion 4: The fourth-most-likely reason for a tax bill on your spouse's estate is that you and your spouse are just plain wealthy. In this case, you should consider more aggressive tactics. Consider making gifts to your children, grandchildren, other loved ones and charities to reduce the value of both your taxable estate and your spouse's taxable estate. For the specifics, see Start Giving It Away Early; Estate Planning with a Roth IRA; and Charitable Trusts.

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Note 5: While you are alive, you can gift up to $12,000 to an individual recipient each year without owing any federal gift tax or using up any of your $1 million gift tax exemption or any of your separate estate tax exemption. (Prior to 2006, this figure was $11,000; and prior to 2002, it was $10,000.) If you are married, the current annual tax-free gift limit is $24,000 per recipient if you and your spouse make joint gifts. While still alive, you can also give away an unlimited amount as long as the money goes directly to an educational institution for tuition or to a medical-service provider to pay for uninsured expenses.

Example 1: You pay $25,000 directly to a private college to cover your grandchild's tuition (not room and board, books, or supplies). This gift doesn't use up any of your $1 million exemption, nor does it preclude you from making an additional tax-free gift under the $12,000 rule. So you could transfer another $12,000 by writing a check to your grandchild for room and board, books, supplies, personal expenses, and whatever. If you have two grandchildren, you could do the same for both. Your $1 million gift tax exemption and separate estate tax exemption both remain fully intact.
Example 2: Say you are single. In 2004, you gave $25,000 to your adult daughter to help her start a business. This means you made a taxable gift of $14,000 ($25,000 minus the $11,000 "freebie" that applied for 2003-2005; gifts made prior to 2002 were subject to a $10,000 limit). If you never made any other taxable gifts, you would enter $14,000 on the taxable gifts line. If you are married and you and your spouse jointly made the $25,000 gift, the taxable gift is only $3,000 ($25,000 minus your $11,000 "freebie" minus your spouse's $11,000 "freebie"). You should enter $1,500 on the line for your taxable gifts and $1,500 on the line for your spouses taxable gifts.

Note 6:

Planning Suggestion 1: Married people are usually advised to leave $2 million (the federal estate-tax exemption amount for 2006-2008) to heirs, via direct bequests or bequests to a trust set up for your kids, including a bypass trust. You are then advised to leave the rest of your dough estate-tax-free to your spouse under the unlimited marital deduction. However, you may have good reasons for not wanting to do this. For example, say this is a second marriage and you really want most of your money to go to children from your first marriage, rather than to your current spouse. Or your spouse may not be good with money. Or you may be worried about what will happen to your money if your spouse remarries. In all these scenarios, a possible "cure" is a QTIP trust. You can specify the ultimate beneficiaries of the trust (usually your kids). Nevertheless, the money in the trust qualifies for the unlimited marital deduction. Your spouse is entitled to all the income from the trust assets as long as he or she lives. See You've Gotta Start Somewhere for more on QTIP trusts.
Planning Suggestion 2: If you are single, the most likely cause of a big tax bill on your estate is lots of life insurance coverage. If this is the case, consider setting up an irrevocable life insurance trust with your kids—or whomever you wish—as the trust beneficiaries. The trust then takes over ownership of the insurance policies on your life. That keeps the death benefits out of your taxable estate (and out of your spouse's taxable estate if you are married). When you die, the death benefits are paid into the trust. The trust fund can then be used for whatever purposes you specify in the trust document (for example to pay for your child's college education or to make staggered payouts when the beneficiary reaches specified ages). See Check Your Life Insurance for more on irrevocable life insurance trusts.
Planning Suggestion 3: The other likely reason for a tax bill on your estate is that you are wealthy, plain and simple. In this case, you should consider more aggressive tactics than the ones explained above. Consider making gifts to your children, grandchildren, other loved ones, and charities to reduce the value of your taxable estate. For the specifics, see Start Giving It Away Early; Estate Planning with a Roth IRA; and Charitable Trusts.

This calculator is furnished by Smartmoney. Smartmoney is not associated with Transamerica Life Insurance Company nor any of its affiliates. While Transamerica provides this calculator as a service to its clients, Transamerica does not guarantee its accuracy, nor does Transamerica give tax or legal advice. Clients and prospects must consult with and rely solely upon their own independent advisors regarding their particular situation. The results and explanations generated by this calculator are hypothetical and will vary due to user input and various assumptions. Transamerica does not guarantee the accuracy of the calculations, results, explanations, nor their applicability to your specific situation. We recommend that you use this calculator as a guideline only. A Transamerica representative can help you with the calculator and your results, and answer any questions you may have.

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