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An Estate Planning Dilemma: Estate and Death Taxes

In the world of estate planning, "Death Taxes" or more properly called, Estate Taxes, make headlines. What you call these taxes when someone passes away depends on your political bent. Republicans use the phrase Death Taxes while Democrats like to call the Estate Taxes. Whatever your bent, everyone wants to know what they are and if they need to be concerned about them. So what are they?

Estate taxes are a tax levied against assets that transfer from an estate to a beneficiary at death, hence the nickname "Death Tax". The total assets are added up, known as the gross estate, whatever bracket the assets fall in determines how much is owed. The estate then pays the taxes and then distributes the assets. So, will my estate need to pay estate taxes?

Most likely, not a chance. Assets up to $5,430,000 are exempt from estate tax. That means that every penny up to $5,430,000 is subject to tax, but receives a dollar for dollar exemption. In basic English, that means that unless the estate has $5,430,000.01 in it, the estate won't pay a penny. So, that's great you say, but I still need to pay income taxes, right?

Wrong, almost all inherited assets are not countable for income taxes. There are some exceptions depending on the situation, i.e. some IRAs, etc. However, most people receive their inheritance income tax free and with a stepped up basis on securities and real property. That's fine Alex, but I'm sure my state has estate taxes, right?

Yes and no, some states do and some states don't. Ohio repealed their estate tax on December 31st, 2012. At the time, Ohio had a very low estate tax threshold and was a real concern for any Ohioan dealing with an estate. My personal and professional opinion is that if Ohio brings back the estate tax, which won't be anytime soon, it will be pegged to the federal amount.

The moral of the story is that while estate and death taxes grab news headlines, the reality is that the vast majority of Americans, especially if you live in a non-estate tax state, will never need to deal with them. However, meeting with an estate planning attorney can make sure that your family is protected from the burden of estate taxes.

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