Understanding Estate Taxes

Estate taxes are separate from probate expenses and final income taxes. Probate costs may often be avoided through proper estate planning tools, such as a revocable living trust, while final income taxes apply to any income earned during the year of death. Estate taxes, however, are a separate matter that can significantly impact the value of an estate passed on to loved ones.

Federal estate taxes can be substantial. Currently, assets exceeding the federal estate tax exemption are taxed at a rate of 40%, and these taxes are generally due within nine months after death. Because estate taxes must typically be paid in cash, families may be forced to sell real estate, business interests, or other valuable assets to satisfy the tax obligation. With proactive planning, however, many families can reduce or even eliminate estate taxes altogether.