What taxes will I have to pay?

For the year 2009, the federal estate tax exempt amount is $3.5 million. In simplified terms, this means that there is no estate tax unless the value of the decedent's estate exceeds $3.5 million. The estate tax is scheduled to expire next year, but it is anticipated that congress will extend the estate tax.

The estate tax is separate from the federal income tax. Any income produced by the trust assets will result in a tax liability to the trust or the beneficiaries, depending on the structure of the trust. Another important income tax issue is the basis step up at death. Under current tax law, property that passes at death receives an income tax basis equal to the fair market value on the date of death. This means that any built in gains in the house are mutual funds vanish at the date of death, potentially resulting in less capital gains taxes. This step up in basis does not occur if the property is transferred as a lifetime gift.