There are three types of death taxes that could apply when someone dies. They are the federal estate tax, state estate taxes, and the federal generation-skipping tax. Regardless of whether there is a probate proceeding, a decedent's estate could be subject to these taxes. Often, these taxes can be reduced or eliminated, provided the proper steps are taken.

Estate taxes are generally based on the net value of all the decedent's property, including the proceeds of insurance policies and one half of the value of jointly owned property, if such property was jointly owned with the spouse of the decedent. The taxes are paid out of the estate at the time of death.

The federal generation-skipping tax is a special federal tax that could apply if you leave property to grandchildren or persons of a younger age. This is one of the most complicated taxes, and it is beyond the scope of this summary. However, if you plan to gift or leave assets to grandchildren and great-grandchildren with a value that does not exceed $1,100,000 of total value, you will not need to be concerned with this tax.

The federal estate tax law is scheduled to be repealed in the year 2010. However, if Congress does not pass new legislation before 2011, the estate tax will be reinstated as the law existed before the legislation. Congress is considering proposals to make the estate tax repeal permanent.

The present federal law gives every person an exemption from the estate tax, which represents the amount of property that can be transferred to a person’s heirs at their death. The amount of this exemption will increase during future years as follows:

2002 and 2003, $1,000,000

2004 and 2005, $1,500,000

2006 - 2008, $2,000,000

2009, $3,500,000

2010, Estate Tax Repeal

2011, $1,000,000 (if Congress does not make repeal permanent)

A person may choose to use this exemption during their lifetime by making gifts. However, the maximum amount of exemption that can be used during a person’s lifetime is a $1,000,000.

The Missouri and Illinois estate tax is based upon the federal taxable estate. Federal law allows an estate to use a state death tax credit to offset the federal taxes due. The Missouri and Illinois state death tax is equal to the maximum credit for death taxes available under federal law. The Economic Growth and Tax Reconciliation Act of 2001 gradually repeals the state death tax credit, which is available to a taxpayer against their federal estate tax. Without new legislation, the Missouri and Illinois state death tax will be effectively repealed from 2005-2010.

There are several ways to save on federal and state estate taxes. For married persons, one of the most effective is to leave certain property to the spouse. Leaving property to charities is another.

Gifts made during life are subject to federal and state gift taxes if they exceed $11,000 per recipient in any one year. If a husband and wife join in making gifts, the gifts to any one recipient may be up to $22,000 without incurring any tax. There is no limit as to the number of recipients in a year, and in addition, these gifts do not count against the lifetime exemption explained above. However, gifts in excess of the above amounts are subject to federal gift tax, and will count against the lifetime exemption available on one's passing. The Economic Growth and Tax Relief Reconciliation Act of 2001 does not repeal the gift tax. Thus, even if Congress chooses to repeal the estate tax, gifts in excess of annual exclusions and the $1,000,000 exemption could be subject to a gift tax.

Estate tax laws and planning for them is an extremely complicated business, especially given that Congress and the states will likely change the rules again soon. The best way to avoid paying more than necessary is to seek the guidance of an attorney familiar with such matters.