Estate Taxes
They say that two things in life are certain: death and taxes. I just wanted to set the record straight and say that I had nothing to do with combining the two. - G. Reaper
Nobody likes to pay taxes. In particular, no taxpayer of sound mind and body likes to pay estate taxes, also known as death taxes.
Whether you view it as one of the last vestiges of communism or a noble attempt to redistribute wealth to those less fortunate, our estate tax system essentially penalizes those who are too successful at accumulating wealth. In order to pass on your wealth to your chosen beneficiaries at death, in addition to probate and other estate settlement costs, you (or more correctly, your estate) may have to pay death taxes at the federal level, and possibly also at the state level.
For example, an estate caught with too much money in 2007 must pay a top federal estate tax rate of 45 percent. A state estate tax may also be imposed on top of that.
Death taxes come in two main varieties: estate taxes and inheritance taxes. The federal government and two states (Ohio and Oklahoma) currently have estate taxes that tax the estate before it is distributed. The following eleven states impose an inheritance tax: Connecticut, Indiana, Iowa, Kentucky, Louisiana, Maryland, Nebraska, New Hampshire, New Jersey, Pennsylvania, and Tennessee.
You should be aware that most of the states (and the District of Columbia) impose what is usually called a "pick-up" estate tax. Although there are different variations of this tax, it is generally designed to tax state residents in an amount that equals the credit that the federal estate tax allows for state death taxes paid. So, if a state resident doesn't have a federal estate tax liability, he shouldn't have a liability under a state pick-up tax. In effect, what the pick-up taxes do is to take a portion of the federal estate tax (usually a rather modest portion) and transfer it to the states. Except for having to file another tax return, a state pick-up tax should have little impact on your estate.
Since federal and state taxes can provide a double-whammy to your estate, don't forget to consider the impact of both when doing your estate planning. We will focus on the federal estate tax first for two reasons: (1) it is potentially applicable to you no matter where you live, and (2) its rates are significantly higher (up to 45 percent in 2007 through 2009) than that other tax that we all love to hate, the income tax (with its 10 percent to 35 percent rates for individuals in 2003 through 2010), as well as any applicable state death taxes.
So get a pot of your favorite coffee or other preferred legal stimulant ready, and read the following sections:
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