Estate Taxes
Estate taxes are essentially taxes on your right to transfer property to your family and friends. Your estate consists of an account of everything that you own at the time of your death. The value of the property is assessed at fair market value, which is not necessarily going to be equal or higher value of what you paid for these items. Once this total is accumulated, it is called the gross value of the estate. The types of property that might be included in this are:
- Cash that you have in your bank accounts
- Real estate
- Insurance policies
- Trusts
- Pensions
- Business interests
Once the executor of your will or your trustee has collected all your assets and arrived at the gross value, there are certain exemptions that you are allowed in order to arrive at the amount of the tax payable on your estate. Some examples of the allowable deductions include:
- Mortgages
- Debts
- Expense associated with administering the estate
- Property that passes to the surviving spouse
- Any bequests you make to charities or schools
In some circumstances, the operating expenses of businesses may be allowed as a deduction.
After this calculation is complete, all the taxable gifts that you claimed on your income tax return since 1977 is added up. The unified credit reduces the amount of taxes that you have to pay. At present, you are allowed to give taxable gifts in the amount of $1 million over your lifetime. Your estate has to pay taxes on any gifts over this amount. However, this only affects less than 2% of the US population.
The estate tax return is due nine months after the date of death. If you need more time to get all the paperwork in order, you need to apply for a six-month extension, but you do have to pay an approximate amount of estate tax before the nine-month due date.
The estate tax does not include any property that is owned solely by the spouse or the children. Lifetime gifts are also excluded if the deceased no longer had any power over them once they gave the gifts.
When you file the estate tax return, you do need to include a copy of the death certificate, a copy of the will and/or trust, any appraisals that have been done on the property and copies of relevant documents regarding any litigation involving the estate.
In the case of large estates that may exceed a million dollars, it is best if you have a lawyer knowledgeable about estate taxes to handle the paperwork for you. As the executor of the estate, you do not have to be present when the return is being examined, unless you are requested to do so to answer specific questions. Having an estate attorney working for you will help to ensure that all documents are handled accurately and efficiently to avoid any problems, delays, or fines.
Once you pay the taxes that the IRS deems as being payable on the estate, then you can start dispersing the bequests and inheritances. Depending on which state you live in, the heirs may or may not have to pay an inheritance tax. If your state does have such a tax, it is the responsibility of the heirs to make the arrangements for this tax themselves. The estate does not have to pay this tax as well.
Every estate has a tax deduction for all property that automatically passes over to the surviving spouse. This deduction is in the amount of $1.5 million, which means that the majority of Americans do not have to pay estate taxes to the federal government. For those estates that do exceed this amount the tax rate can be quite high – often as much as 48%.
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2008-04-07 12:21:18
Probate is the legal process of settling a deceased person's estate, which includes paying creditors or debts, and distributing the assets of the deceased to the correct beneficiaries. It is a complic ... [read more]