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How does the federal estate tax exclusion affect Coloradans?

Colorado residents with large estates may have questions about the $5 million federal estate tax exclusion and how it affects them. Because it doesn't affect the majority of residents, few may have even heard of it.

For example, if a resident dies in 2014, the typical exclusion will be $5.34 million, an increase from last year's $5.25 million. However, transfers between two spouses are generally tax-free.

Portability comes into play as well. After the death of a spouse, the surviving spouse is usually given access to use "the unused exclusion amount of the deceased spouse" and does not have to create trusts for the purpose of saving taxes. One of the managing directors for New York's Deutsche Asset & Wealth Management says that the surviving spouse is able to use the leftover exclusion, which will be added to the exclusion of the survivor, "for making lifetime gifts or protecting more property from estate tax at death."

Because of the intricacies involved in interpretations of the tax code, it is always best to bring questions regarding taxes to an estate planning attorney for clarification. He or she can also determine what property is included in the estate and which deductions are allowable. Another good source of estate tax information is the IRS website.

According to the Colorado Department of Revenue, Colorado has not collected a state estate tax since 2005. The state also does not collect state inheritance taxes, which are assessed against the share each beneficiary receives.

The time to address these questions and concerns is prior to the death of a beloved spouse or other family member. Don't compound your grief by muddling through financial matters when emotions are running high.

Source: The Wall Street Journal, "The Federal Estate-Tax Exclusion" Tom Herman, May. 24, 2014

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