Estate tax is an evil term to most Americans, but most Americans really don’t have to worry about an estate tax. The estate tax only hits the wealthy. It was put into place for two principal reasons. First, the estate tax raises revenue for the federal government. (Your state may have an inheritance tax or a “death tax,” but technically it doesn’t have an estate tax.) Second, the estate tax was enacted to break up wealth and redistribute it. This has prevented the wealth in America from being concentrated in the hands of just a few families. In many countries there isn’t an estate tax, and on the order of 90 percent of the wealth is concentrated in just a couple of families. Many people make estate planning mistakes, putting too much emphasis on their estate tax.
Technically, when a person dies, all of their assets are subject to the estate tax. Every dime is taxed. Some basic trust planning could save them a lot of money in inheritance taxes. There may or may not actually be an estate tax collected, but every dime is taxed. Each person gets a tax credit up to a certain amount. The amount of credit changes almost every year. It is called the “unified” credit, because it can be used to offset either an estate tax liability or a gift tax liability. Estate taxes and gift taxes have been “unified” into a singe tax structure. Actually, part of the credit can be used against the estate taxes owing and the other part could be used against a gift tax that may be owed to the Feds.
The amount of property that has to be taxed in order to generate a tax exactly equivalent to the estate tax / gift tax is the “exemption equivalent.” For example it may take $2 million in property to generate a tax equal to the exemption equivalent in effect at the tine the tax is calculated. You will have to look up on an estate tax table and see what the tax is for the year you’re interested in. The exemption equivalent should also be shown on the table for the year you are interested in.