Word: taxed
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...relative no one wants to leave money to is Uncle Sam. That's why it's worth paying attention to recent changes in the federal estate tax. Now $1 million can pass to heirs tax-free, up from $675,000 in 2001, and the amount will gradually increase to $3.5 million in 2009. But that federal exemption may not protect your estate from a steep state tax bill when...
Although the federal estate tax is set to disappear in 2010, many states aren't as eager to bury their own death taxes. In the past, most states imposed an estate tax that was linked to the federal tax. The Federal Government would give the estate a credit for the amount of the state estate tax paid. Now Congress has decreased that state death-tax credit--it's scheduled to go away in 2005. Yet some states have changed their laws to keep that money coming in--by imposing their own estate tax...
Eighteen states--including Oregon, New Jersey, New York and Pennsylvania--and the District of Columbia have separated, or "decoupled," their estate tax from the federal system. "Now those states will be imposing a tax equal to what the state death-tax credit used to be," says Lawrence Chane, an estate-planning attorney with Blank Rome in Philadelphia. "But because there won't be a credit against the federal tax, the overall tax burden for families in those states is going to increase substantially...
...example, a $1 million estate that would be free from federal estate taxes this year could still incur an extra $33,200 in estate taxes in Pennsylvania and New Jersey. If your estate was more than $1 million, you would face even higher federal and state taxes. This year's top federal estate-tax rate is 49%, though the wealthiest estates could wind up paying as much as 57% in federal and state estate taxes in decoupled states. Chane says the burden is "particularly acute" for married couples because their estate plans usually include what is known as a bypass...
There are ways to rewrite your will or trust to defer that state tax, but you need to make sure that in doing so, your estate won't face a greater federal tax burden down the road. Portland, Ore., couple Betty and Les Barkley put a disclaimer in their will so that the surviving spouse could delay paying taxes by refusing to accept a portion of the estate. Another approach is to claim a special marital tax deduction. Giving away enough money to bring the taxable estate below the federal and state thresholds or moving to a state that...