The government requires money in order to operate and continue providing necessary services for a safe and productive society. However, in order to obtain these required operating funds, the government must levy taxes on the population which it governs in California and in every other state. Most people are aware of the income tax system and how it works. On the other hand, many are not so familiar with how the estate tax and gift tax system operates.
The difference between the estate tax and the gift tax is the difference between life and death. Certain transfers of assets that a person makes while still alive are subject to gift taxes. This may include real estate, money or interests in a portion of property or even a business. Alternatively, the estate tax is different from the gift tax because the estate tax is levied following a person’s death.
However, not everybody’s estate is subject to the estate tax. According to 2013 laws, the estate of a decedent is not liable for estate taxes from the federal government for assets under $5.25 million. This amount is continually adjusted in order to take inflation into consideration. Therefore, most American taxpayers will not be responsible for paying federal estate taxes.
On the other hand, one should not be too quick to dismiss the federal estate tax. Those in California or in any other state should know that some property which one may not consider to be a part of one’s estate is actually counted as part of the estate by the government. For example, many people do not realize that life insurance owned by the decedent or the employer of the decedent is also considered a part of the decedent’s estate. Therefore, it is important to have a strong understanding of applicable estate laws in order to minimize tax liabilities.
Source: Fox Business, “The Basics of Estate Planning,” Constance Fontaine, June 19, 2013