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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.
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 which
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.
Federal
estate tax.
We will
focus here
on the
federal
estate tax
for two
reasons: (1)
it is
potentially
applicable
to you no
matter where
you live,
and (2) its
rates are
significantly
higher (18
to 50
percent in
2003 through
2009) than
that other
tax that we
all love to
hate, the
income tax
(with its 10
to 35
percent
rates for
individuals
in 2003
through
2010).
Actually,
although
there is a
separate
federal
estate tax,
tax
liability
is computed
on the basis
of what is
called the
federal
unified
transfer
tax. The
unified
transfer tax
is made up
of three
distinct,
but closely
related,
taxes: the
estate tax,
the gift tax
and the
generation
skipping
transfer (GST)
tax. Both
the federal
gift tax and
the GST tax
have their
own set of
rules and
planning
strategies,
but for
purposes of
this
discussion,
we'll only
briefly
introduce
them and
point out
their main
purpose: to
prevent
avoidance of
the estate
tax. Without
the gift and
GST taxes,
individuals
—
particularly
wealthy
individuals
— could get
out of
paying the
estate tax
by making
lifetime
transfers.
The unified
transfer tax
is computed
with
reference to
the value of
the property
that is
considered
to be in
your
gross estate
at death,
and to the
value of
taxable
gifts that
you made
during your
life.
Generally,
if the total
of your
lifetime
taxable
gifts and
the value of
the property
that you own
as of the
date of your
death
exceeds $1.5
million (for
2004 and
2005), a
transfer tax
liability
may be owing
on amounts
that exceed
this figure.
If this tax
applies, it
will be
steep: the
lowest
effective
tax rate
that will
apply is 41
percent!
The estate
tax
exemption
will rise to
$2 million
in
2006-2008,
and $3
million in
2009. After
that, the
estate tax
will be
repealed
altogether
for one year
in 2010.
But even if
your estate
is too large
to fall
within the
exemption
amount, all
is not lost!
There are
many
deductions
and
strategies
available to
reduce or
eliminate
the transfer
tax
liability.
Here's what
you need to
consider:
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