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Message #670 Death tax

mp3 #670 What Taxes Have To Be Paid When Someone Dies? (mp3 file)

There are two types of death taxes. They apply whether or not there is a court probate proceeding. However, due to recent changes in the Federal Estate Tax, for decedents dying on or after January 1, 2005, California no longer imposes a state death tax.

The other type of death tax is the "federal estate tax." This is a tax by the United States on the property of a person who dies, and, in effect, on the "privilege" of passing wealth from one generation to another.

The various death tax rates and available exemptions are determined under the law in effect at the time of death, rather than at the time of filing the returns. The federal and state tax laws are changed from time to time, but the old laws still apply to those who died before the effective date of a new law.

Federal law now permits a one hundred percent marital deduction. This means you may leave an unlimited amount to your spouse, without paying any death taxes when you die. Also, under current law, there is no federal estate tax due on estates under $2,000,000 for decedents dying in 2006. This exemption was lower in the past and increases in the future. This exemption is a combined estate and gift exemption. However, the gift tax exemption is limited to $1,000,000. If substantial gifts, or gifts not qualifying for the annual exclusion, have been made, the entire estate tax exemption may not be available. This is because the exemption is a "unified" exemption applicable to both the Federal estate and Federal gift taxes.

For estates over $2,000,000 (decedents dying in 2006), the tax rates increase with the value of the net estate. The higher the taxable estate, the higher the tax rate. Federal estate tax rates are now limited to a maximum of 46%. There are many available deductions and exemptions that may reduce the taxes.

To determine the net value of the decedent's estate, you take the fair market value of all of the decedent's property owned or transferred with retained benefits or controls (including certain life insurance and retirement benefits) at the time of death or alternate evaluation date, if that is elected, and then, you subtract the decedent's debts, funeral bills, and certain administrative expenses. Further deductions and credits are also applied to arrive at the net estate on which the tax is due. The decedent's assets may be appraised by qualified private appraisers, or by an official called a California probate referee. If an estate is subject to court probate proceedings, a probate referee is appointed by the court. The amount a probate referee may charge in probate proceedings is set by law.

The Federal Estate tax is due nine months from the date of death. Interest accumulates on unpaid taxes, so it is important to file the estate tax return and pay the taxes within the nine-month period following the decedent's death. There are provisions under Federal law for deferred payment with a very low interest rate, in certain limited circumstances.

The Federal tax return form (a form 706) is available from the Internal Revenue Service branch offices. These forms may also be obtained from a lawyer who routinely handles such matters.

Because the death tax laws are complex and significant tax savings and opportunities are available, it is important for you to plan carefully with an experienced attorney how your estate plan should be structured and also how your estate will be handled upon your death. This includes how title to your property should be held during your life.

It is possible, with proper estate tax planning, to save thousands of dollars in taxes that your loved ones would have to pay after your death.

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