Estate Tax Basics

• The estate tax is a levy on estates for the right to distribute property to a decedent's beneficiaries. In practice, the tax is only applied to estates valued over $5 million, which is the amount of the estate tax exclusion. All property that the decedent had a property interest in is included in the taxable estate, minus certain deductions. These deductions include fees paid for the administration of the estate and property transferred to spouses or charity.
  
  

Definition of Cosigning

• The act of cosigning involves one person taking on the responsibility of paying someone else's debt if the original debtor defaults. What generally happens in this scenario is that the original debtor enters into a loan contract with a party that lends him money to purchase an asset, such as a house or a car. The asset purchased using the money obtained by the loan is used as collateral to secure the loan. In some situations, the lender requires additional assurances that the loan will be repaid. The cosigner provides this assurance, as he guarantees to pay off the loan if the debtor's payments and the value of the asset are insufficient to cover the debt requirements. The ownership of the underlying asset does not shift to the cosigner if he enters into the debt agreement.
  
  

Cosigned Property in Estate

• The cosigned property is included in the estate at its fair market value (FMV) on the estate tax return, or form 706. The property will either be reported on Schedule A if it is real estate or on Schedule E for all other tangible assets. In addition, the debt associated with the asset is deductible and will be reported on Schedule K of the return, decreasing the taxable estate. Also, it is the responsibility of the estate to settle the debts of the decedent before distributing assets to beneficiaries. This means the estate will settle the debt by selling its assets to cover the amount, relieving the cosigner of his obligation to the lender.
  
  

Tax Tips and Disclaimer

• When managing complex estates, consult with a tax professional, such as a certified public accountant (CPA) or licensed attorney, as he can best address your individual needs. Keep your tax records for at least seven years to protect against the possibility of future audits. Every effort has been made to ensure this article's accuracy, but it is not intended to be legal advice.