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The main thing to know about estate taxes is... they will change. Look on Wikipedia or ask anyone in the field for the current tax structure. Because estate taxes change (sometimes suddenly and unexpectedly—consider the year of 2010, which had no estate tax) you must write your will and trust documents flexibly and update them as often as necessary.
In a nutshell, here is how it works: If you have enough assets (cash, your home, investments, your business, etc.) when you die, your estate has to pay federal taxes (you may become very familiar with IRS form 706, the death taxes form). You may also have, in a few states, if you are rich enough and/or give outside your family, to pay some inheritance taxes to the state your estate is in. You get a significant exemption before you have to start paying any federal estate tax—currently $5,000,000—which is designed to shield most people from having to pay estate tax. To quickly learn more, read the Wikipedia entry on United State's estate tax.
Is Estate Tax only for the Rich?
In general, only the estates of the rich get taxed, but it doesn't always work that way. If your elderly grandparents die in a year when the exemption is low and the family farm or business (the ownership of which may be shared upon their death by twenty children and grandchildren) happened to be valued high that year, the estate could owe a lot of tax, requiring the property to be sold.
Another scenario is that your grandfather could leave half of his estate to his second wife and half to his children/grandchildren from his first marriage. In order to attempt to minimize taxes until the spouse has died (to be sure she has enough money), the will is often written to defer all taxes until her death. Then, when she dies, often wills and trust documents quickly drawn up by casual estate lawyers will either not identify who pays the taxes (then laws or precedence kicks in), or imply that the children pay all estate taxes. Thus, the entire tax exemption may go the the spouse (or rather to her children, whom for a second wife, may be completely unrelated to either you or your grandfather). A good estate and trust lawyer will allow the grantor (the person with the money writing their will/trust document) to make an informed decision (hopefully).
And Then There Is Generation Skipping Tax...
When a bequest “skips” a generation, and goes to grandchildren, then a quite harsh and draconian tax, the GST or “generation skipping” tax applies. This means that the estate will be taxed TWICE. It is a very stiff penalty. It was designed, as social engineering, to keep the rich from leap-frogging vast amounts of money down the generations without paying tax, but until the exemption for estate tax was raised in 2011, GST tax applied to a lot of families that kept their family's quite modest wealth intact until the grandparents were very old.
You really have to think carefully and often about estate tax. If you are running a trust, you have to make really good decisions. This will mean consulting with a skilled tax expert. If a bank is running your trust, you have to be on top of them all the time. Again, this will mean YOU consulting with a skilled tax expert—shouldn't be the case, that you have to do the work and the bank gets paid, but that is how it is, at least in less progressive states. If you need help finding experts, give me a call. No promises of finding an expert that is both cheap and good. So educate yourself before you start paying for advice.