The most significant tax is the federal estate tax. Depending on the size of your taxable estate, the federal estate tax rate ranges from 41% to 49% in 2003 for estates over $1 million. Under the 2001 Tax Act, the highest estate tax rate will gradually decrease until it reaches 45% in 2007. The IRS allows a surviving spouse who is a U.S. citizen to receive an unlimited amount of property, free from federal estate tax (the unlimited marital deduction). However, when your spouse dies, the remaining estate is subject to estate taxes.

In addition to the federal estate tax, there are state taxes, also called "estate," "inheritance," or "succession" taxes. To date, approximately 12 states impose a state inheritance tax. State taxes are much less than federal taxes, and vary by state. Basically, the difference between the two is this: The federal tax is assessed on the transfer of the deceased individual's total estate; the state tax is based on the value of a gift passed to a particular beneficiary and the relationship of that beneficiary to the deceased person.

There are other taxes as well: If you own property in a foreign country, or stock in a foreign corporation, you may need to pay death duties. There are also fiduciary taxes that the estate must pay on income received on estate assets.

You also need to pay income tax on the last year of the deceased's life by the next April 15. "If your spouse is the decedent," notes MsMoney.com   "you may file a joint return, as long as you do not remarry before the end of the tax year."

• Did You Know...?
  The first estate tax in the U.S. was created in 1898 to help finance the Spanish War. The Spanish War Tax was levied on personal property over $10,000.

• Did You Know...?
  You have nine months to pay federal estate taxes, if the gross estate exceeds $1 million in 2003 and $1.5 million in 2004.

• Helpful Hint...
  Keep a list of all death-related expenses, which may be deductible for the current tax year.

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