Estate Taxes

They say that two things in life are certain: death and taxes. Just to set the record straight, it was Congress, not me, that chose to combine the two. - G. Reaper

Nobody likes to pay taxes. And, no taxpayer of sound mind and body likes the idea of paying estate taxes, also known as death taxes.

Whether you view it as Congress' effort to take your money when you are least able to complain or as a noble attempt to redistribute wealth to those less fortunate, our estate tax system essentially penalizes those who have successfully accumulated wealth during their lifetimes. 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 most likely at the state level as well.

For example, an estate caught with too much wealth in 2009 had to pay a top federal estate tax rate of 45 percent. Estates of those who died in 2010 had to choose between paying 35 percent estate tax or no tax, but having assets transferred with a modified carry-over basis. Those who died in 2011 and 2012 faced a top tax rate of 35 percent. Beginning in 2013, the top rate is 40 percent. A state estate or inheritance tax may also be imposed.

Estate and inheritance taxes. Death taxes come in two main varieties: estate taxes and inheritance taxes. The estate of the decedent pays an estate tax; the beneficiaries do not owe tax on the amounts they receive from the estate. In contrast, in an inheritance tax system, the beneficiaries are required to pay tax upon the amounts that they received from the state.

The federal government currently has an estate tax. The following fiftenn states also have either a stand-alone estate tax or an estate tax resulting from the decoupling of state and federal tax schemes.

States with an Estate Tax (January 2013)
Connecticut	Delaware (prior to 7/1/13)	District of Columbia	Hawaii
Illinois	Maine (prior to 1/1/13)	Massachusetts	Minnesota
New Jersey	New York	Ohio (prior to 1/1/13	Oregon
Rhode Island	Vermont	Washington

Eight states impose inheritance tax, although some classes of beneficiaries, such as a surviving spouse or children, are not subject to tax.

States with an Inheritance Tax (January 2013)
Indiana	Iowa	Kentucky	Maryland
Nebraska	New Jersey	Pennsylvania	Tennessee

Twenty-nine states do not impose either an estate or an inheritance tax.

Since federal and state estate 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 35 percent in 2011 and 2012 and 40 percent after 2012) than either the state estate tax rates.

So get a pot of your favorite coffee and read the following sections:

• federal estate taxes
• state estate taxes

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