The federal estate tax is a tax on your right to transfer property at your death. An “estate”, for purposes of this tax, consists of everything that you own or otherwise have a right to transfer. The value of your assets is the current “fair market value” of those items, not necessarily what they were worth when you acquired them or the purchase price you paid for them. All these items, totaled together, comprise your “gross estate.”
A taxable estate, which (as the name implies) is the amount upon which the estate tax is based, consists of the gross estate less certain deductions.
Additionally, the value of some business interests or farms may be reduced in some cases. Federal tax law also allows what’s called an “applicable exclusion amount.” This is the amount in which a deceased person may first pass to their non-spousal heirs without imposition of federal estate tax.
In 2018, the exclusion amount is $11,180,000. It is annually increased to reflect inflation. The law also makes the exclusion amount “portable”, so the second spouse to die can use their own exclusion amount as well as any unused exclusion amount from their spouse. For estate valued above the exclusion amount, the tax rate in 2018 is 40%. This means that for every dollar your estate passes about $5,590,000, it will owe $0.40 in federal estate taxes.
Bear in mind, that the gross estate includes residual funds left in a decedents retirement account such as an IRA, 401K, etc. and, is in addition to, standard ordinary income taxes which may be due and payable by the beneficiary.
However, careful estate planning can provide some relief with regard to estate taxes, in particular circumstances. The law recognizes certain techniques that provide married couples with planning mechanisms to help them retain the credit of the spouse who dies first.