Can the death tax cost you a fortune?

Despite what you may have heard, the death tax is not meant to break the bank.
Despite what you may have heard, the death tax is not meant to break the bank.
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Many taxpayers are concerned about the so-called death tax. Congressional debate in late 2010 over taxes on wealth transfers, and the media messages presented by groups opposing the taxes and using the term "death tax," brought this subject to the attention of American taxpayers. If some of the stories are to be believed, misuse of this law and honest mistakes by taxpayers can easily wipe out the estate left behind when a family member dies [source: Policy and Taxation Group].

But can inheritance and estate taxes -- often referred to as death taxes -- actually wipe out a person's estate? The question bears consideration as many Americans plan for their families' futures.

In short, the answer is "not necessarily." Estate taxes, if your estate qualifies for them, can take a significant portion of the overall value. And the confusing nature of this tax, along with the stress of settling it soon after the loss of a family member, can set the stage for costly filing mistakes. But information is available to reduce the chance of your entire material legacy being taken by the government when you die [source: IRS].

The process of evaluating and taxing an estate can be confusing for someone not accustomed to working with tax documentation and procedures. The IRS has a number of free documents available on its Web site, and exploring these is one of the best ways to familiarize yourself with the basics of estate tax filing [source: IRS]. Since estate tax laws changed in late 2010, it's wise to read as much as you can about the laws and how they may or may not affect your estate. Any competent tax attorney or accountant should be familiar with these changes and can assist you with understanding their key features [source: Herpe].

Next, let's learn a little more about estate tax planning.

Forethought is Key

Armed with information on the laws, you can answer the first crucial estate tax planning question: Does your estate qualify for the estate tax exemption? In 2011, estates valued at less than $5 million per taxpayer are exempt from the tax. Determining what qualifies as part of your estate may be tricky, however. It includes wealth you transfer during your lifetime as well as what you leave to your heirs [source: Pacific Life]. Sorting through the specifics of your estate may be difficult, especially if you've already given away portions of your wealth without considering the tax implications. In such a case, your time and money may be best spent by hiring a tax professional to help you.

If you determine that your estate will exceed the $5 million lifetime exemption, you owe it to your family and heirs to come up with a strategy that will minimize their tax burden after you die. Thankfully, there are a number of ways to do this effectively. If you're married, you can grant income-producing wealth, such as retirement accounts, to your spouse. While this doesn't eliminate the tax on this income, it does allow your spouse to postpone tax payments on part or all of the wealth until he or she dies [source: Pacific Life]. You may also be able to transfer a portion of your wealth to your heirs or a charitable organization in your lifetime, a move that changes the way that wealth is evaluated and taxed. If done properly, this could save you and your heirs from paying too much tax [source: Mayerhoff].

You've worked hard during your lifetime to accumulate your estate. You want the friends, family members and organizations you give that wealth to after your death to receive the maximum benefit from it. If not planned for properly, estate taxes can indeed take a painful bite out of your accumulated wealth. But a little forethought and knowledge, along with the assistance of an estate-planning expert, can help you ensure that your legacy lives on in the wealth you share with others.

For lots more tax information, check out the links on the next page.

Related Articles

Sources

  • American Family and Business Institute. "What is the Death Tax?" 2009. (Jan. 20, 2011)http://www.nodeathtax.org/deathtax
  • Combs, Susan. "Texas Taxes: Inheritance Tax." Window on State Government. (Jan. 22, 2011) http://www.window.state.tx.us/taxinfo/inherit/
  • Herpe, David A. et al. "Wealth Transfer Planning Considerations for 2011 and 2012." McDermott Will & Emery. Jan. 20, 2011. (Jan. 22, 2011) http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/9e8952ff-a1f5-4fa8-99bb-f5e9a9b9f266.cfm
  • IRS. "Estate and Gift Taxes." June 22, 2010. (Jan. 11, 2011) http://www.irs.gov/businesses/small/article/0,,id=98968,00.html
  • IRS. "Forms and Publications." Jan. 21, 2011. (Jan. 22, 2011) http://www.irs.gov/formspubs/index.html
  • IRS. "Introduction to Estate and Gift Taxes." Dec. 14, 2009. (Jan 22, 2011)http://www.irs.gov/pub/irs-pdf/p950.pdf
  • Jacobson, Darien B. et al. "The Estate Tax: Ninety Years and Counting." IRS. June 18, 2008. (Jan. 11, 2011)www.irs.gov/pub/irs-soi/ninetyestate.pdf
  • Mayerhoff, Gerald L. "Giving Foundation: Minimizing the Inherited Income Tax." Baptist Health South Florida. Feb. 6, 2004. (Jan. 22, 2011)http://www.baptisthealth.net/en/giving/Pages/Minimizing-the-Inherited-IncomeTax.aspx
  • Money-Zine.com. "Federal Inheritance Tax." (Jan. 22, 2011) http://www.money-zine.com/Financial-Planning/Tax-Shelter/Federal-Inheritance-Tax/
  • Oregon Department of Revenue. "Inheritance Tax." Oregon.gov. Aug. 31, 2010. (Jan. 22, 2011)http://www.oregon.gov/DOR/BUS/inher-general.shtml
  • Pacific Life. "Estate Tax Exemption Amount." December 2010. (Jan. 22, 2010) http://www.pacificlife.com/Channel/Educational+Information/Estate+Planning+Concepts/Estate+Tax+Exemption+Amount.htm
  • Policy and Taxation Group. "Horror Stories & Articles." 2009. (Jan. 20, 2011)http://www.policyandtaxationgroup.com/html/stories.html
  • Retirement Living Information Center. "Taxes by State." January 2011. (Jan. 22, 2011)http://retirementliving.com/RLtaxes.html
  • Schwab, Carol A. "Planning Your Estate: Estate and Gift Taxes." North Carolina Bar Association. October 2001. (Jan. 19, 2011) http://www.ncbar.org/download/planningYourEstate/taxes.html