What Taxes Have To Be Paid When Someone Dies?
The information below is from the Oregon State Bar's Tel-law service, a collection of recorded legal information messages prepared by the lawyers of Oregon. In addition to being online, the Tel-law service is accessible by telephone at 503-620-3000 or toll-free in Oregon only, 1-800-452-4776. A touch tone phone allows direct access 24 hours a day, 7 days a week. To receive a free Tel-law brochure listing the subjects available call 503-620-0222, ext. 0.
The following information regarding taxes is brought to you as a public service by the lawyers of the State of Oregon. The material presented is general legal information intended to alert you to possible legal problems and solutions.
The first type of tax is called the Federal Estate Tax. It only applies to estates that exceed $1,500,000 for deaths occurring in 2004. This amount increases in following years. The Federal Estate Tax is based on the net value of all property and possessions of the person who has died, called the decedent. If during a person's lifetime, he or she created a 'revocable living trust,' the assets in that trust would also be included in the taxable estate. This property is referred to as the decedent's gross taxable estate. For death tax purposes, the estate includes property that is in the decedent's name alone, jointly held property, proceeds from life insurance owned by a decedent, certain items the decedent controlled or had an interest in, and amounts in pension plans.
The second type of tax is called the federal generation skipping transfer tax. It applies to transfers totaling more than $1,500,000 to persons more than one generation younger than the decedent. The amount exempt from federal generation skipping transfer tax increases in following years. When this tax applies, the tax rate is 48% of each dollar in excess of the $1,500,000 exemption.
The third type of tax is called the Oregon Inheritance Tax. This tax applies at different levels than the Federal Estate Tax. In 2004, the level is $850,000. The amount exempt from Oregon Inheritance Tax increases in following years. The different levels at which Federal Estate Tax and Oregon Inheritance Tax apply creates a number of issues which generally require professional advice.
For large estates, it is important to minimize federal estate tax. The following techniques reduce these taxes:
For married couples, an important tool is the unlimited marital deduction that
allows property to be transferred freely between spouses without federal estate
or gift tax. This can defer tax until the death of the second spouse, when
property passes to other family members or beneficiaries. To reduce death taxes
upon the death of the surviving spouse, it is important to plan while both
spouses are alive. The full marital deduction is not available if the surviving
spouse is not a U.S. citizen. However, the full deduction is available if the
surviving spouse lives in the United States and becomes a U.S. citizen within
nine months of the death of his or her spouse.
A credit shelter trust or by-pass trust is a vehicle used to avoid death taxes. The will or a so-called 'living' trust would set up the credit shelter trust. The credit shelter trust would be funded with the amount exempt from federal estate tax upon the death of the first spouse without any of the property being taxed. Further, the trust assets would remain free of death taxes upon the death of the second spouse. If you are uncomfortable with a mandatory trust, a lawyer can set up a trust that allows more flexibility.
Another way to avoid or minimize death taxes is to make annual gifts of $11,000 per person. This can be done without having to file a gift tax return. A married couple can transfer up to $22,000 each year to each beneficiary by both spouses choosing to split the gift. If gifts are split, a gift tax return must be filed by April 15th of the year following the year of the gift. The cash or property that is given is eliminated from the estate of the husband and wife. In several years, a couple with substantial estates and a large family can dramatically reduce the size of their estates, assuming they are willing to make the gifts to family members or other beneficiaries.
Lifetime gifts to tax-exempt organizations or charities or bequests at death to charities are also ways to minimize or eliminate death taxes.
Although Tel-Law information is periodically reviewed, it is important for you to realize that changes may occur in this area of law.
This information is not intended to be legal advice regarding your particular problem, and it is not intended to replace the work of an attorney