The IRS recently announced that it will increase its federal estate tax exemption amount for 2012. For an estate of an individual that dies during calendar year 2012, the basic exclusion from estate tax amount will be $5,120,000, up from $5,000,000 in 2011.

The federal estate tax is a tax on property transferred pursuant to a death. Essentially, it is the tax that the family or beneficiaries of a deceased person must pay on that inheritance. Only those estates that exceed this amount must pay estate taxes, and the estate is only taxed on that portion of that exceeds the threshold amount.

For purposes of determining whether or not a federal estate tax return is required, it is important to determine the value of the “gross estate.” The “gross estate,” consists of the fair market value of everything owned on the date of death. The IRS also allows adjustments for taxable gifts and certain deductions including deductions for mortgages, debts and the expenses to administer the estate. Moreover, all property that passes to the surviving spouse or a charitable organization with federal 501(c)(3) exempt status is excluded from the taxable estate. After these adjustments and deductions are accounted for, only those estates with a “gross estate” that exceeds $5,000,000 (or $5,120,000 in 2012) need to file a federal estate tax return and pay estate taxes.

In addition, the IRS permits reductions in value for certain real property in determining the value of the estate. The total decrease in value permitted will decrease in 2012. For Special Use Valuation for qualified real property, the aggregate decrease in the value of the property resulting from the election cannot exceed $1,040,000, in 2012, up from $1,020,000 for 2011.

There are a number of other exemptions and reductions permitted in determining the gross value of the estate for federal estate tax purposes. For a complete list of the increases in tax benefits for 2012 see http://www.irs.gov/newsroom/article/0,,id=248485,00.html, which lists all of the income tax benefit increases, exemptions, standard deductions, and tax brackets for 2012.

Federal estate tax calculations are complicated, so I always recommend working with CPA to determine whether or not an estate tax return is required for a specific estate. However, the best way to ensure that your family avoids paying federal estate tax is to plan ahead with the use of trusts and other estate tax reducing tools. Work with a team including an estate planning attorney, financial planner and accountant to determine how you can plan your estate to reduce taxes and other complications for your family.

For questions or advise on federal estate tax and estate planning contact Kalispell, Montana attorney Kelly O’Brien at (406) 752-6373.