Estate Taxes

Estate taxes are the amount of federal taxes paid at the time of death for certain assets, including real estate, annuities, insurance, trusts, cash and securities. Estate taxes are paid on the decedent's taxable estate, which is derived from deducting certain allowable deductions from the decedent's gross estate. Common deductions include certain charitable donations, certain debts, and certain allowable expenses.

Do my heirs have to pay an estate tax when I die?

Most Americans do not have to pay an estate tax because the tax law allows up to $5.34 million in 2014 (indexed for inflation) to be given away before an estate tax is assessed. If you own an estate which is worth less than the personal exemption, you will not have to pay a federal estate tax. Additionally, spouses may also pass their estate to a surviving spouse tax free through the marital deduction or to a tax exempt charity.

Unfortunately, however, even if your heirs are able to avoid a federal estate tax, certain states, have state estate taxes which must be paid at the time of death. If you have a large estate it is important to talk to an experienced estate planning lawyer, who is familiar with both state and federal estate tax laws, to understand your tax obligations.

Limiting taxes on your estate

The first step to limiting your tax liability is to create an estate plan. Steps to create an estate plan include creating a will or trust, assigning a power of attorney, and assigning a medical power of attorney. Next, take an inventory of your investments, including all of your real estate, personal property, retirement savings, cash, and other assets. Finally, determine who will inherit your estate.

Talk to an estate planner about the benefits of creating a trust. In some cases creating a trust is the best way to allocate gifts, distribute assets, reduce taxes, and avoid probate court. Next, talk to your heirs and make sure they understand where all of your important documents and financial information is stored and who will inherit what property and assets.

Review the state and federal tax rates and make sure you understand whether leaving your spouse all of your estate is the best decision for your family (doing this may allow you to delay paying some federal taxes, but it could burden your children when your spouse dies). Review your options to avoid certain estate taxes by giving gifts or making payments for medical or educational expenses. Finally, you may also be able to avoid paying certain taxes if you donate your money to a charity.