WHAT TAXES HAVE TO BE PAID WHEN SOMEONE DIES?


There are five types of taxes that might apply when someone dies. Generally speaking, these taxes are applicable whether or not there is a will and whether or not such person's property goes through the process of probate. However, there are steps which can be taken to reduce or eliminate these taxes.

The first type is called the "Federal Estate Tax," which is a transfer tax paid to the United States Government. The second type of tax is the "Florida Estate Tax," which is a transfer tax paid to the state government. The third and fourth type of taxes are the "Federal and Florida Generation-Skipping Transfer Tax." The fifth type of tax is the federal income tax. A person that dies is referred to as the "decedent." His or her property is referred to as the "estate." This may be the income tax due on the decedent's final return (Form 1040) for the income earned and paid prior to his death or the income tax due on the income paid the estate after the decedent's death and reported on the estate's income tax return (Form 1041).

The Federal Estate Tax is determined by adding the value of all the decedent's property subject to probate or passing through a living trust, certain property owned jointly by the decedent and another, usually the proceeds of all life insurance on the decedent's life, all pension and profit-sharing benefits certain types of powers over property held in trust, and other property and certain lifetime transfers.

Once the value of all the decedent's property is determined, it is reduced by certain deductions, such as deductions for funeral expenses, the expenses of administering the decedent's estate, and debts that the decedent owes on his or her property and to general creditors. A deduction may also be allowed for property passing to a surviving husband or wife or a charity. Special rules apply, however, if the surviving spouse is not a U.S. citizen. It is possible that no Federal Estate Tax will be owed if all the decedent's property passes to a surviving husband or wife or to charity. However, the transfer of all property to the surviving spouse may result in the estate of the second spouse to die paying more taxes than would otherwise be necessary.

If the value of the decedent's estate, after these deductions are subtracted, is equal to or less than $600,000 for decedents dying or gifts made by 12/31/97; $625,000 in 1998; $640,000 in 1999; $660,000 in 2000; $675,000 in 2001; $725,000 in 2002; $750,000 in 2003; $800,000 in 2004; $900,000 in 2005, and $1,000,000 in 2006, no Federal Estate Tax will be owed due to a credit each individual has against Federal Estate and Gift Taxes that exempts the equivalent of the above-listed amounts. The exemption is indexed annually after 2006 for inflation. However, if the decedent's estate, after these deductions, is over the exemption amount, for example $625,000 in 1998, a Federal Estate Tax ranging from 37% to 55% may apply, depending on the value of the decedent's estate.

The second type of tax that may have to be paid at the decedent's death is called the Florida Estate Tax. This type of tax is only payable when there is a Federal Estate Tax imposed and then it is only the amount of the maximum credit against Federal Estate Taxes allowed for payment of Florida Estate Taxes. This tax does not increase the total estate taxes if the decedent is only domiciled in Florida at the time of death. It is a portion of the tax which would otherwise be paid to the IRS.

The third and fourth types of tax are the Federal and Florida Generation-Skipping Transfer Taxes. These are taxes that apply only if the decedent is transferring over $1,000,000 to either a generation beyond that of his or her children or to a trust for the benefit of his children that will eventually pass to his grandchildren. For example, if the decedent's will or certain trusts created by him or her transfers over $1,000,000 to the grandchildren, the Generation-Skipping Transfer Tax may apply. A tax of 55% may be imposed on such transfers in addition to Federal and Florida Estate Taxes.

Additionally, gifts made during life may be subject to another tax, the Federal Gift Tax. Generally speaking, gifts made to an individual during any one year are not subject to gift tax if the total gifts that individual receives from one person are less than $10,000. There are also exceptions for qualified gifts to a husband or wife or to a charity. If properly planned, gifts may save taxes at death. But if not properly planned, gifts could possibly increase the taxes. Gifts exceeding the $10,000 exclusion reduce the credit against Estate and Gift Taxes and therefore the estate tax exemption equivalent previously outlined. The estate tax exemptions has a phase-in increase up to $1,000,000 in 2006. The gift tax exclusion is indexed for inflation after 1998. The estate tax exemption is indexed for inflation after 2006.

The fifth type of tax is the Federal Income Tax on the income earned by the estate between the date of death of the decedent and the closing of the estate. In addition, it is necessary to pay the decedent's final income tax on the income earned and received prior to death.

Since there are so many legal details and so many different conditions and times at which these taxes will be charged, it is important for each person to have planned carefully with an attorney how his or her estate should be handled upon his or her death, how gifts should be made during his or her lifetime, and to consult with an attorney for the necessary returns to be filed.

If you believe you need legal advice, call your attorney. If you do not have an attorney, call The Florida Bar Lawyer Referral Service at 1-800-342-8011, or the local lawyer referral service or legal aid office listed in the yellow pages of your telephone book.