There are various taxes that would be applied to the property transfers upon the property owner's death. Generally, two main types of taxes are estate taxes and inheritance taxes.
An estate tax is a government tax which is applied on the privilege of transferring property to other person upon the owner's death. Before the assets are well distributed to the designated beneficiaries, this particular tax will be assessed against the estate itself and is paid out of the estate in advance. An inheritance tax is a tax on the actual property received and the person who has actually inherited the property will have to pay the tax. An estate tax is assessed by the federal government.
There are various states where they impose additional estate taxes and inheritance taxes according to their local rules and regulations. Additionally, there is a gift tax on property transfers during a person's life which the federal government and a few states will apply. Nevada is the only state that won't impose any estate, inheritance, or gift taxes at all. It is always good to verify basic information regarding your local state's tax situation in advance.
For the estate taxes, recent changes in the federal Income Tax Code have released an estimated 95 percent of the American public from any federal estate tax liability upon their death. According to the current Internal Revenue Service rules, there is an exemption from all estate tax for the first $1 million of a person's assets. In case of married couple, both you and your spouse are entitled to separate $1 million exemptions per each. The $1 million has been increasing over the past few years: to $1.5 million in 2004; $2 million in 2006; and $3.5 million in 2009. In 2010, the tax code is scheduled to be repealed altogether.
Additionally, all of the value of a person's estate that is left to a spouse is exempt from any federal estate tax. Even though your particular assets are over this minimum exemption, there are still legitimate methods to lower or remove your tax liability. If your assets (or your joint assets as married couple) total is over approximately $1 million, it is recommended that you consult a tax professional prior to preparing your will for the best way of handling your asset distribution.
As a rule, state estate taxes are also very minimal or even non-existent until the total value of your estate becomes over $1 million. Most state's estate tax laws are tied directly to the federal estate tax regulations. Therefore it allows for the same level of exemption equivalent from state estate taxes on death if the estate property totals under $1 million. It is possible that a few states may impose an additional level of estate tax.
Less than half of the states will impose an inheritance tax on the receipt of property due to somebody's death. Generally, there tend to be high exemptions allowed and the inheritance taxes are usually scaled so that spouses, children, and close relatives will have to pay much lower rates than more distant relatives or unrelated persons.
For the most Americans people, the changes in the federal estate tax have virtually eliminated any consideration of tax consequences from the preparation of a will. But other factors will affect the planning of your own will.
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