• The executor of an estate must calculate estate taxes prior to distributing funds to heirs.A businessman calculating expenses at tax time image by Christopher Meder from Fotolia.com
  
  When a person dies, the executors of her estate pay inheritance taxes--also known as estate taxes--on the value of her estate. The executors must pay estate taxes prior to distributing inheritance money or property to beneficiaries and may have to pay estate tax for years to come if the estate continues to generate income. The Internal Revenue Service allows estate holders to take a unified credit on most estates, which helps offset the high tax burden.
  
  

Unified Credit

• Inheritances from estates qualify for a unified credit. If the credit is less than the amount of tax owed, the estate must pay taxes on it. In 2009, the unified credit amount was $1,455,800 and the exclusion amount was $3.5 million. This means that inheritances of less than $3.5 million were covered by the credit. The executor of the estate therefore did not have to pay taxes before distributing inheritances from estates worth less than $3.5 million.
  
  

How Estate Taxes are Calculated

• The IRS calculates a person's gross estate at the time of death and assesses estate taxes accordingly. In addition to the value of the deceased person's property, the IRS takes into account the value of life insurance payments to the person's heirs, annuities payable to the estate and property transferred to heirs in the three years prior to the person's death. The IRS subtracts funeral expenses, the deceased's outstanding debts, charitable deductions and state death taxes from the gross estate to determine how much estate tax, if any, is owed on the estate.
  
  

Filing Estate Tax

• If tax on the estate at the time of death is greater than the unified credit, the estate's executors must file taxes on the estate. Estate taxes are filed using Form 706.
  
  

Income Tax on Estates

• If an estate generates income of greater than $600 per year (i.e. through investments not given to an heir until she reaches a certain age) or a beneficiary is a non-resident alien, the executors must pay tax on the income. The executors' obligation ends when all beneficiaries have received their final payments from the estate.
  
  

Estate Tax Repeal

• Congress is considering a temporary repeal of inheritance taxes in 2010, according to nodeathtax.org. Under this plan, estate taxes would be repealed in 2010 but reinstated in 2011. If this plan is approved, the 2011 tax rate will be 55 percent of the estate and an exemption of $1 million. Comparably, the tax rate in 2009 was 46 percent of the estate and an exemption of $2 million.