Understanding Estate Taxes
How To Reduce Or Eliminate Your Estate Cost
1. Who has to pay estate taxes?
Depending on how much you own when you die, your estate may have to pay estate taxes before your assets can be fully distributed to your loved ones. Estate taxes are different from, and in addition to, probate expenses (which can be avoided with a revocable living trust) and final income taxes (on income you receive in the year you die).
Federal estate taxes are expensive (historically, 45-55%) 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 if you plan ahead, you can reduce and even eliminate estate taxes.
Your estate will have to pay federal estate taxes if its net value when you die is more than the "exempt" amount set by Congress at that time. Currently in 2010 there is no federal estate tax, but it is scheduled to return in 2011 with a $1 million exemption and a 55% tax rate. Compare this to 2009, when the exemption was $3.5 million and the tax rate was 45%. There is no question that more people will be paying more in estate taxes. Also, some states have their own death or inheritance tax, so your estate could be exempt from federal tax and still have to pay a state tax.
Year of Death........."Exempt" Amount
2009.........................$3.5 million
2010.........................N/A (estate tax repealed)
2011 and therafter.......$1 million