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This Week’s Financial Strategy – Estate Planning 101 – Part 4

December 11, 2010

An excerpt from Follow the Money Weekly Radio with Jerry Robinson – 12/11/10

To hear the entire program, click here.

by John Bearss


Hi Jerry. As we continue to talk about building a solid estate plan, I would like to remind your listeners that this is a great time of year to talk to the people that are going to execute your estate plan.  You want to make sure they know your wishes and also what steps you have already implemented.

Over the last several weeks we talked about what estate planning is and who might need it.  We also discussed how to do it and where do you begin.  We also suggested how taxes could be the largest potential expense to your estate.

Today let’s focus on State Death Taxes and Federal Income Taxes.

States impose their own death taxes. You should be aware of what the death tax laws are in your state and how they may affect your estate. There are three types of state death taxes: First is estate tax, secondly inheritance tax, and third credit estate tax (also called a sponge tax or pickup tax). Some states also impose their own gift tax and/or generation skipping transfer tax.  So let’s discuss each.

The state estate tax is imposed on property you transfer to others at your death, much like federal estate tax. The state estate tax calculation for most states is similar to the federal calculation.

Now unlike estate tax, the inheritance tax is imposed on your beneficiary’s right to receive your property. Taxes are due on each beneficiary’s share of your estate. Beneficiaries are grouped into classes generally based upon their family relationship to you and are taxed accordingly. Although inheritance tax is due on each heir’s share of your estate, it’s your personal representative who writes the check from your estate to pay it.

Some states impose a credit estate tax also referred to as a sponge tax or pickup tax and most states that imposed a credit estate tax have “decoupled” from the federal system.  That means they are imposing some form of stand-alone estate tax.

Keep in mind: The federal system allows a deduction for state death taxes for the estates of persons that have passed away during the years of 2005 through 2009. Prior to 2005, a credit was available, which will be reinstated in year 2011.

Let’s discuss the three Federal Income tax considerations that your estate needs to plan for:

  1. The first consideration is if your estate plan includes the use of a trust, you need to know that a trust may be an income tax-paying entity. The trustee may be required to file an annual return and pay income taxes on trust income.
  2. The second consideration is that your personal representative or surviving spouse has the duty of filing your last income tax return that covers the tax year ending on the date of your death.
  3. And the third consideration is that your estate is considered a separate income taxpaying entity. Your personal representative must file and pay income taxes on any income your estate receives for example: 1099 interest from bonds or savings accounts, or dividends from stock.  These are all considered income.

Next week we will bring this series to a close as we talk about other items you need to be aware of like: How does Probate effect my estate?  Are liquid assets important to have inside the estate?  What happens if I become incapacitated?  And what are some goals I should consider as I develop my estate plan?

I trust this financial insight has been helpful and I look forward to the next time when I can help you provide the foundation for a lifetime of financial independence.

About John Bearss: John R. Bearss is a Retirement Specialist with the Christian Financial Advisor Network. He has been helping clients and financial professionals understand financial strategies for 24 years.

Disclaimer: John Bearss is a registered representative of and does offer securities through Sicor Securities, Inc.  Lifetime Decisions Management, nor it’s representatives provide legal or tax advice.  Please consult your CPA or qualified tax advisor before making any decisions. Lifetime Decisions Management, Inc. is not a subsidiary of nor controlled by SICOR Securities, Inc.

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