Federal Estate Taxes

The federal government assesses estate taxes on estates that exceed the allowable exemption amount (currently $2 million) in the year in which a person dies. Estate tax rates on funds in excess of the exemption can reach almost 50 percent. Taxes are applied to all the assets in the estate but only to some assets held in trusts, which is why establishing a trust or trusts can be an important estate planning tool for some individuals. Estate taxes are paid by the estate's executor (the personal representative of the estate), appointed previously by the decedent (deceased person) or by a court-appointed representative if the executor appointed by the decedent is unable to serve.

Federal and State Income Taxes

If you receive any income, dividends, capital gains, rents, or interest during the year you die, your executor must file federal and state income tax returns (in addition to an estate tax return) on your behalf.

State Inheritance Taxes

Inheritance taxes are taxes assessed by states that your heirs-not your estate-must pay upon your death. The government does not normally give credit against federal estate taxes for payment of inheritance taxes, since inheritance taxes are not paid by your estate.