Understanding Estate Planning and Estate Taxes

Most states do not impose a death tax on your estate. All of the preceding taxes are paid to the Feds of the state directly from the estate proceeds.

Your estate is the total value of all your possessions: all you own (such as your home, car, pension plans, plus what may be owed to you) minus all that you owe. It sounds like your net worth, doesn't it? A word of caution: When reviewing all that you own, it is just the assets that are held in your name that get included in our estate. If you own your home with your spouse/child/partner, only part of the value of the home is yours, and only that portion should be included in the value of your estate.

What you do need to include here that you did not include in your net worth is the proceeds from your life insurance policies if you should die. So pull out your net worth worksheet and add in the life insurance proceeds to see what the value of your estate might look like. This will give you some numbers to work with when doing estate tax planning.

The estate ad gift tax is a transfer charge assessed on property you give away either during your lifetime or upon your death. The estate and gift taxes are called "unified" because the same tax rates, deductions, and rules apply to both. You can, during your lifetime or upon your death, give away $675,000 of assets without incurring a federal estate tax. This is your "exemption." If you have not given away assets while you were alive, the federal estate and gift taxes would apply to your estate only  if it was valued at more than $675,000 for 2001.

The $675,000 limit for 2001 will be indexed to $1 million by 2006. Estate are subject to tax rates starting at 37 percent ad going as high as 55 percent once you hit the $3 million mark. A look at your net worth will let you know if you need to do some complicated estate planning. If you are married, you may leave everything to your spouse free of federal estate taxes. This is the unlimited martial deduction. If you can take advantage of your $675,000 for 2001, you may want to do some fancy estate planning using trusts or gifting so that each of you can take advantage of your $675,000 exemption. If you do no planning and leave everything to your spouse, then upon his/her death he/she is only entitled to use own exemption amount in estate plan---yours, if it has not been used, is lost forever.

Most states do not impose a death tax on your estate. If your estate is large enough to require paying estate taxes on the federal estate tax form, there is a credit that is allowed to the state. Most states "sponge" the credit from the Feds and are happy with that. This does not increase the taxes at all; the Feds just share it. The states that still do charge an estate tax are Mississippi, North Carolina, Ohio, Oklahoma, and New York, which is phasing out its tax.

All of the preceding taxes are paid to the Feds of the state directly from the estate proceeds. Some states, however, do have an inheritance tax that is paid by the heirs on the assets they receive. The rates vary from state to state.

Congress, in all of its wisdom, is beginning to understand that Americans don't like being taxed. In 2000, President Clinton vetoed a bill that would have repealed the federal estate tax. So stay tuned, because the fight isn't over! No matter when it is repealed, it will be phased out over a period of time, so you still need to do your estate planning. And remember that estate planning isn't just about avoiding the long arm of Uncle Sam.