Estate Tax Exemption

OK, you have forced me into it. I have tried to avoid the topic of estate planning because it is complex and research never quite gets me to the bottom of it. But I do get a lot of mail on the topic, and many are concerned (rightly) about tax implications if a co-owner or owner dies. The reason this is complicated is that it is under constant evolution. Under Bush-era tax law, estate taxes were declining through yearly increases in the estate tax exemption to the year 2010. At the end of 2010, the tax law that provided for the increasing exemption expired, potentially defaulting back to earlier tax law with very high estate taxes. At the last minute (December 2010), the US passed the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Tax Relief Act)" which essentially extended and increased exemptions to estate taxes for two years (2011 and 2012). We will have to see what happens then.

Anyway, the nominal amount of the exemption for estate taxes (which has now been combined with gift taxes) is $5M. Great! So no estate tax on the first $5M? Well, not so fast. My understanding of it through additional digging is that for Canadians the unified exemption is prorated based on the ratio of US assets to Canadian Assets.

So, if you have $4m of assets in total, and your US assets (say a house) are $128,000, then the exemption would be 128,000 / 4,000,000 x $5,000,000 or $160,000 and your estate may pay up to 35% of the remainder. In this case the $128K house is less than the exemption, so no tax.

For a smaller worldwide asset base...say $2m, with $200k of US property, the exemption would be 200,000 / 2,000,000 x $5m = $500k exemption.

Therefore, your actual exemption would be based on your personal estate value and location. For many, there might not be any estate tax. Others might not be so lucky. But I don't believe it is the earth shattering disaster that many articles would have us believe.

Otherwise, there could be "probate" fees, which I would guess varies by state. I don't believe Arizona has probate fees.

I am no expert on this, just a reader like you. So please check out the Tax Relief Act of 2010 and draw your own conclusions. See above for the full name of the act.