The Federal Estate Tax is a tax on all property you own at your death that exceeds the estate tax credit amount. In 2014 the credit amount is $5,340,000. It is expected to increase every year going forwards in an amount according to the inflation rates.
So, if the total value of everything you own at your death, including, but not limited to: real estate; annuities; life insurance policies; IRA’s; bank accounts; investments; trusts; vehicles; boats; businesses; and, cash is less than $5,340,000 you owe nothing.
If it is greater than $5,340,000, there are certain allowable deductions to help reduce the size of the potentially taxable estate. Some of these deductions include: estate administration expenses; attorneys fees; CPA fees; mortgages; other debts; property passing to a surviving spouse; and, charities. It should be noted that certain business interests or farms might be eligible to have their value reduced.
If you have made any lifetime gifts, where the annual amount exceeded the annual allowable exclusion, this will be added to the value of your federal taxable estate to determine if you exceed the $5,340,000 amount.
If the value of your estate, after taking all deductions and adding back in any excess lifetime gifts, exceeds $5,340,000, the amount in excess will be taxed at 40%. For example, if the total value of your estate is $5,700,000 then $360,000 ($5,700,000 – $5,340,000) will be taxed at 40% for a total estate tax due of $144,000.