Estate Taxes: 10 Things to Know

  1. In the year 2010, Congress voted to repeal estate taxes. They may either extend this repeal beyond 2010 or not. They may review the legislation prior to 2010 and these will have a significant impact on federal estate tax.
  2. The probate estate’s size is not related to the size of the estate that is subject to federal tax. Taxable estate includes all the properties owned by the person or a trust that is under the control of that person; properties owned by a trust but in which you have a significant interest; life insurance proceeds if policy is owned by the decedent or payable to their estate; and qualified retirement proceeds.
  3. In 2004 and 2005, individuals who are dying can “shelter” $1.5 million of their estate from federal estate tax because of the annual increments until it reaches the amount of $3.5 million in 2009. Some of this shelter amount may be used in lifetime gifts.
  4. You can make annual lifetime gifts of $14,000 to any number of recipients without having to pay federal gift and estate tax, and without using any from the shelter amount.
  5.  Spouses can leave as much as they want to a surviving spouse without their estate paying for federal estate tax, provided that the surviving spouse is a U.S. citizen. But the estate may still be subject to federal estate tax when surviving spouse dies.
  6. If you want to use a trust to reduce your taxable estate, then it is important for you to relinquish the control of the trust to another, and it should be an irrevocable trust.
  7. If a property is expected to increase in value in the future, it is better to turn it into a lifetime gift to save the estate from taxation when the value increases, or delay the payment of taxes for another generation. But if a property has already increased in value, it would be better to transfer it to another through a will because the recipient will get a stepped-up basis that will be equal to the property’s value upon your death. So if the property will be sold afterwards, the capital gains tax will be for the amount of the value that the property is sold minus the amount of the property upon your death, and not the amount that was originally paid for the property.
  8. The executor must file a Final United States income tax return on behalf of the decedent.
  9. Know if your state has laws on inheritance or estate tax.
  10. An accountant or an experienced tax attorney could provide an invaluable assistance in helping prepare for the federal and state tax returns of the decedent. An expert estate planning lawyer could assist and guide you in preparing the necessary documents to close out a deceased estate.

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