Estate Taxes

Who Pays Estate Taxes

Learn what the financial requirements are for owing estate taxes, as well as who is responsible for paying estate taxes.

Not everyone has to worry about paying federal estate taxes, which leads us to the question: who pays estate taxes? Your estate will have to pay estate taxes if the net value (gross assets minus debts) when you die is more than the exemption amount set by Congress. However, under the new tax law signed June 7, 2001 by President Bush, the estate tax will be gradually decreased until it falls to zero in 2010. Then, on January 1, 2011, the estate tax law will revert to current tax laws unless Congress revisits the issue. If your estate falls under the government exemption your trustee/executor does not have to file an estate tax return (Form 706) and pay the required tax within 9 months of your death. This means that those who do not fall under this exemption will have to file this form and will be in the category of those who pay estate taxes.

Many people feel confident that their estate will pass without the threat of paying estate taxes. Unfortunately, though, most do not adequately calculate the value of their estate. With careful calculation many find that their estate values are over the exemption rate, which means that their executor or trustee will be someone who pays estate taxes on the inheritance.

It is important for you to realize what property will be included in your estate for federal estate tax purposes. The estate includes all property owned at the time of death: investments, cash, real estate, vehicles, personal property, life insurance proceeds from policies owned by the decedent within three years of death, life insurance paid to the estate, retirement assets and business interests. All of these will play a part in determining if your heirs will be people who will pay estate taxes.

The estate also includes assets passing through probate as well as assets inherited directly by joint owners or beneficiaries. This includes part interests, intangible property, property placed in a revocable living trust and other interests transferred by a decedent who retained control or an interest in the property. As you can imagine, once calculated, you may be surprised to find your net worth. You may also find that it puts your estate into the category of those who pay estate taxes.

Currently, if your estate (including all of the above) exceeds $1.5 million, then you may be a person who pays estate taxes. The 2001 law increased the exemption amount and reduced the top tax rates over the next several years. For example, if you die in 2005 with a net worth of $1.3 million, your heirs will not be among those who pay estate taxes. If the law had not changed, then your heirs would have had to pay tax on $350,000 ($1.3 million minus the old 2005 exemption of $950,000). That’s over $180,000!

Some states have an estate tax, too. To find out more information on state inheritance taxes, and to find out if you are among those who pays estate taxes in your state, you should contact a CPA or tax attorney in your area.