1. The U.S. Congress has voted to repeal the estate tax in the year 2010, and may or may not extend the repeal beyond that year. This legislation may be revisited at any time prior to 2010, and any such steps by Congress will have a major impact on the federal estate tax.
2. The size of the probate estate has nothing to do with the size of the federal taxable estate. The taxable estate includes: all property owned by you or by a trust you control outright; property owned by a trust to which you have significant "strings attached;" qualified retirement plan proceeds; and life insurance proceeds, if the policy is owned by the deceased or payable to his or her estate.
3. In 2004 and 2005, persons dying may "shelter" $1.5 million that is not subject to the federal estate tax. This amount is due to increase in annual increments until it is $3.5 million in 2009. Lifetime gifts made by the deceased may use up some of this shelter amount.
4. You may make annual lifetime gifts of $11,000 to an unlimited number of recipients, which gifts are excluded from the federal gift and estate tax and do not use up any of your "shelter" amount.
5. A spouse may leave his or her entire estate to the surviving spouse without the estate being subject to the federal estate tax, as long as the surviving spouse is a U.S. citizen. However, the estate will be subject to the federal estate tax upon the death of the surviving spouse.
6. Using a trust to keep property out of the taxable estate will only work if you give up control of the trust. It must be an irrevocable trust!
7. It is better to make lifetime gifts of property that is expected to go up in value in the future, because the increase in value will escape estate taxation or delay taxation for another generation. Conversely, it is better to give property that has already significantly increased in value through a will because the person receiving the property gets a "stepped-up basis" equal to the property's value at the time of your death, and if the property is sold, capital gains taxes will be the difference between the value at your death and the price obtained rather than the amount you paid for it and the price obtained.
8. A final United States income tax return must be filed on behalf of the deceased.
9. It is important to determine if your state has a state inheritance or estate tax to consider.
10. An accountant and/or an experienced tax attorney can assist you in preparing federal and state tax returns for the deceased. A knowledgeable estate planning attorney can help you prepare the many other documents that are necessary to close out the deceased's estate.