BRIEF OVERVIEW OF FEDERAL AND CALIFORNIA DEATH TAXES

1.  Due date.  A death tax (technically called an “estate tax”) is a tax imposed on the right of a decedent to give away assets at death.  The tax is due and payable in full nine months following a decedent's death unless an extension or a long term payment plan is available.

2.  Step #1 Compute net estate.  The death tax is assessed against a person's "net estate". To determine the "net estate", we need to take a financial picture of a person’s assets and liabilities at the date of death.

a.  Value the decedent's gross assets at fair market value, not cost.  This includes proceeds from life insurance policies and pension and profit‑sharing plan benefits if the decedent had the right to designate who would receive them at death.

b.  Deduct any mortgages, liabilities, debts, funeral and administration expenses.

3.  Step # 2 Deduct exempt items.

            a.    Spousal exclusion.  Any part of a decedent's net estate which passes (either outright to, or in a qualifying manner, such as a Qualified Terminable Interest Property ‑ or "QTIP" Trust for) a spouse who is a United States citizen passes free of death tax.  Any property passing to a non-citizen spouse may escape the death tax at the first spouse's death only if the disposition is in a Qualified Domestic Trust ("QDOT").

            b.   Charitable exclusion.  Any part of a decedent's net estate which passes to a charity (either outright or in a qualifying manner, such as a charitable remainder trust) passes free of death tax.

            c.   Exempt amount (increase phases in).  An exempt amount of assets passes free of death taxes. The exempt amount varies, depending on the year of death.

Death in            2003                       1,000,000

2004 & 2005            1,500,000

2006 to 2008            2,000,000

2009                          3,500,000

2010                          Unlimited

2011                          1,000,000

4.  Step #3 Pay death tax on balance.  Any excess assets are taxed at between 47% and 50%.

5.  No Separate California Inheritance Tax.  On June 9, 1982, California abolished its separate "inheritance tax" system.  Therefore, any death tax computed under paragraph 4 above is divided between the federal and California governments.