Estate Tax Basics - If Only it Were Like Monopoly!

By Pablo Palomino
Explaining the basics of Federal estate taxes and how estate plans address these taxes.

Have you ever played Monopoly and collected a $100 inheritance from the Community Chest cards? If only it were that easy - collect an inheritance, no taxes, no liabilities, just a simple payout. Unfortunately, our estate will be taxed, and this is why so many aspects of an estate plan deal with reducing taxes.

Estate tax is the IRS's way of taxing you for the right to transfer property. In the past, this tax has been applied to any assets over a certain value. In 2009, that value was $3.5 million, so if your estate was valued at $5 million, your heirs would pay taxes on the $1.5 million excess. Now that may sound like quite a bit of money, but considering all assets of an estate - a home, vehicles, bank accounts, stock and retirement plans, that amount may not be so much after all.

In 2010, the federal estate tax was phased out completely, but only for the year. Unless Congress passes a new law before the end of the year, the estate tax will be reinstated in 2011 at a threshold of just $1 million.

In the past, many have chosen to simply leave their entire estate to their spouse, because gifts and bequests to your spouse are not taxed at all. But even despite the great tax breaks, this may not be the best tactic for future generations, as you are increasing your spouse's taxable estate, which may place a large tax burden when the surviving spouse passes. It also does not make good use of the estate tax threshold mentioned above.

There are several ways to address the federal estate tax law, and it should be a consideration when you begin an estate plan. For example, certain monetary gifts are not taxed, and can help reduce your estate, such as an annual monetary gift of $13,000 to an individual or paying the medical bills of an individual (as long as payment is made directly to the provider or institution rather than the individual).

An attorney that specializes in estate planning is well versed on the Federal tax laws and can help navigate these tricky waters. In the meantime, do not pass Go, do not collect $200....