Definition of Estate

• An estate is a collection of all the property, both real and personal, money, and assets owned by a person at the time of his death. To calculate the value of an estate, you must add up fair market value of all property and then reduce any debts owed by the deceased person. The resulting number is the value of the decedent's estate, and this figure determines whether the federal estate tax must be paid.
  
  

Federal Estate Tax

• If an estate is large enough, meaning it has a total value of $5 million or more, the personal representative or estate executor must pay federal estate taxes on behalf of the estate. If an estate is worth less than $5 million at the time of the decedent's death, the estate does not have to pay estate, or death, taxes to the IRS.
  
  

Inheritance Taxes Under State Law

• Even if an estate is not large enough to be subject to the federal estate tax, an individual recipient of a distribution from the estate may have to pay state inheritance taxes. Inheritance taxes are paid by the person who receives the estate distribution. Not all states have enacted an inheritance tax, and the minimum thresholds for when inheritance taxes apply vary among the states that have enacted an inheritance, or death, tax.
  
  

Tax-Avoidance Planning

• To make things more complicated, careful estate planning can result in a reduction or total elimination of all death taxes in certain circumstances, even for estates or inheritance distributions worth millions of dollars. These tax-avoidance mechanisms are complicated and should be handled by estate planning experts, but they are available by use of trusts and lifetime gifts. If you plan ahead, your estate may not have to pay death taxes even if you own millions of dollars worth of assets at the time you die.