You’re familiar with the phrase: “Nothing’s certain except death and taxes”; but, exactly what are death taxes and will they apply in your personal situation?

The answer is a moving target because both federal and state governments are desperately trying to find as much tax money as they can… since they are quickly going broke. Now, I know that statement may sound somewhat far fetched, but it’s true.

The point is that even though current tax law defines what and how personal assets are taxed at death… our laws are made from sand that surely shifts as time passes. However, there are some aspects that seem to survive over the years… and those are what we will focus on right now.

There is a basic premise that anything titled exclusively in your name (except your primary residence) will be subject to tax upon your death. I know this doesn’t seem fair, but taxes never are. So, for example, if you have a car that is driven by both you and your spouse, its value will be taxed when you die if the license registration is only in your name.

Likewise, if each of you has your own checking or savings account, it will be taxed when one or you die. In other words, legally the ownership of things falls totally on the grave of the registered owner of any asset.  The trick is to either have joint ownership or (where permitted) title the accounts as “pay on death” or “transfer on death”.

There Are Both Federal and State Death Taxes

By the way, federal regulation is typically followed by most states, but not always so. Therefore, you need to understand how things are taxed in your state. This is especially important in community property states.

Personal residences generally pass without tax to the surviving spouse by virtue of a special exemption. Also, revocable living trusts can hold title to certain assets and, consequently, remove legal ownership from you personally. Nevertheless, you can be the grantor trustee and control everything while you are alive. When you die, your surviving spouse (if you wish) can automatically become the surviving trustee and carry on legally without any disruption or death tax consequence.

Retirement accounts (such as 401k, pensions and IRAs) are technically owned by you even though you maintain control over the investment decisions. When you die, your appointed beneficiary will receive the assets without being subjected to taxes on death. Income tax, of course, will be due upon liquidation or distribution based on certain guidelines.

Another beneficiary transaction involves life insurance. Your appointed beneficiary will receive the death proceeds without either death or income tax provided the policy has been set up properly. One thing to keep in mind is that if you have appointed your spouse as beneficiary and he or she dies before you do, it is vital that you appoint someone as secondary beneficiary. Otherwise, you risk having the death benefit be subjected to income tax… which destroys one of the best benefits of life insurance death proceeds.

It’s no secret that there are numerous places to go on the Internet to find free and discounted legal forms. For example, it is common these days to find a place to get a will drafted for about $20. While many of these services are valuable, nevertheless, some states have very strict regulations and may not honor such a will. Getting some professional advice is important.

Are Death Taxes The Same As Estate Taxes?

There is a lot confusion these days listening to our illustrious congressmen banter about discussing the pros and cons of death taxes… sometimes referred to as estate taxes. This just feeds the trough for lawyers to confuse you about buying their software driven wills and trusts packages sometimes costing you thousands of dollars.

The average guy or gal on the street does not require anything fancy.  Basic rule of thumb is to:

• Get a living will to legally direct whether or not you wish to be kept alive on a feeding tube.
• Have a basic will so the courts will ensure your assets go to whomever you wish them to go.
• Use a revocable living trust to remove high value assets from your name in order to avoid probate costs (money down the proverbial rat hole), as well as ensure a smooth transition to your loved ones.

But, what are death taxes and how they affect your particular situation is not something you need to spend too much money on unless you happen to have a very sizeable estate.