Generally, for estate tax purposes, you must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. If death occurs in 2006, 2007 or 2008, Form 706 must be field if gross estate is more than $2,000,000. In the year 2009, for estate tax purposes, this exclusion amount will increase to $3,500,000. Thus if a person can postpone his or her death from December 31, 2008 to January 1, 2009, his or her gross estate may save estate tax on $1,500,000, which at the estate tax rate of 45% amounts to $675,000.
For the year 2010, the federal estate tax will be repealed. However, for 2011, the federal estate tax will be reinstated with the exclusion limit of just $1,000,000. The highest federal estate tax rate is 46% in 2006 that decreases to 45% in 2007-2009 and increases to 55% in 2011. Currently, bills to permanently repeal the federal estate tax are pending in Congress. If passed, the federal estate exclusion amount and estate tax rate for 2011 may decrease or may be permanently repealed. Even for the year 2010, the situation may change, if the Congress decides.
When a person dies, someone (or personal representative) must take care of the decedent’s affairs and file the pending income tax returns and the final return. The personal representative can be an “executor” named in a decedent’s will or an “administrator” appointed by the court if no will exists, if no executor was named in the will or if the named executor cannot or will not serve. The personal representative must collect all the decedent’s assets and, if the gross estate is more than the filing requirements for the year of death, the personal representative must file Form 706 within 9 months of the decedent’s death. Then the personal representative must distribute the remaining estate to the beneficiaries. Till then, the estate may have to pay the federal income tax.
An estate is a taxable entity separate from the decedent and comes into being with the death of the individual. It exists until the final distribution of its assets to the heirs and other beneficiaries. The income earned by the assets during this period must be reported by the estate. The estate’s income, like an individual’s income, is reported annually. For the tax year 2006, every domestic estate with gross income of $600 or more must file a Form 1041, Income Tax Return of an Estate.
Most people just don't think about what will happen to their wealth or estate after the death. They assume it will smoothly pass on to their families. This assumption, in many cases, results in complications and disputes that could easily have been avoided. It ignores the fact that the estate must pay the federal estate tax in cash within nine months of the death. For paying the taxes and other administrative costs a part or most of the estate will be liquidated and the remaining estate will be distributed according to the law of the state. Even it may not pass on to your desired beneficiaries. Thus to take care of various situation arising after your death, a proper planning is necessary. This planning is necessary to ensure that your assets pass on to persons you care about, the taxes on your estate are minimized, your assets are controlled in a mature manner, and for many more reasons.
The estate planning is necessary for most of us even if we expect our gross estate to be less than the exemption limit. There are several reasons for you to begin developing an estate plan immediately. The most important as well an integral part of your estate plan is your will. Your will is effective only upon your death. A properly drafted will must name an executor, must name a guardian, if you have minor children, and must have details, as specifically as possible, on how you want your property distributed. During your lifetime you can, as frequently as you want, make changes in your will, prepare a new will, or even revoke the will. If you already have a will and an estate plan, it is always better that you review it frequently to make changes according to the situations such as change in your job or business, your assets, your family, your marital status, and the changes in the tax laws such as the estate exemption limit.
If you die without a will, your property will be distributed according to the laws of your state. Different states have different laws on the distribution of the estate. In short, your property will not be disposed according to how you desired but it will be disposed according to the state law. Part or all of the your remaining estate, which is left after paying the taxes and other administrative costs, may even pass on to the state. Besides, if there is no will, your heirs may get entangled in various disputes and court cases over the division of the assets. Besides, when you die someone must take care of your going day-to-day chores like paying utility bills, maintenance of your property, filing tax returns and paying taxes, taking care of your funeral and burial. In short, you must not postpone the job of preparing a will. Write a will for the sake of your loved ones.
If you don’t have a will and have not yet figured out how your assets are to be handled when you are gone, start planning. Start planning about who will administer your estate, how your estate be managed to minimize the tax liabilities and to distribute it according to your desire and how your business be taken care of when you are gone. As a part of your estate planning, it is important that you figure out how much you leave for your spouse so that each of you fully utilizes your estate tax exemption amount. It is true that if you leave everything for your spouse, there will not be any estate tax liability. It amounts to postponement of the assessment of estate taxes till the surviving spouse dies. Think what happens when your spouse also dies. Your assets are included in the surviving spouse's gross estate. Besides, in the best interest of your family, you may not like to leave all your assets to your spouse.
There are many other factor and options to consider while planning your estate. You should learn more about the Life Insurance options, various trusts (including Bypass Trusts and QTIP Trusts), and Durable Power of Attorney and Health Care Proxy.
(This text is not intended to serve as an advice on the financial matters. For tax and financial planning consult your attorney and/or CPA. Most of the facts and figure related to federal estate tax are copied from or are based on the IRS Publication 559: Survivors, Executors, and Administrators.)
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