Understanding Life Insurance Trusts
How to Reduce or Eliminate Your Estate Tax Cost
2. What are estate taxes?
Estate taxes are different from, and in addition to, probate expenses and final income taxes (which must be paid on any income you receive in the year you die). Some states also have their own death/inheritance tax; you could be exempt from the federal tax and still have to pay a state tax.
Federal estate taxes are expensive -- the rate is 45% -- and they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated -- if you plan ahead.