Two things we will all face are death and taxes. And, thanks to the federal government's labyrinthine tax codes, some of the biggest tax bills we receive can come after we pass away, going straight to the loved ones who inherit our belongings. Luckily, comprehensive estate planning, including the use of gifts, irrevocable trusts and holding companies, could help us avoid the many tax pitfalls that stand ready to take a chunk out of our life's work.

What Kind of Taxes Are at Work Here?

So-called "death taxes" involve several distinct types of taxes, including estate taxes, inheritance taxes and gift taxes. Estate taxes are those paid by the original property holder on the value of property (money, bank accounts, cars, real estate, etc.) that is bequeathed to us from loved ones who pass away. These federal and state taxes are often automatically deducted before any property can pass to heirs. These taxes have historically been steep, ranging anywhere from 35 to 55 percent since 2001.

Inheritance tax, on the other hand, is a tax paid by the person who receives property from a deceased loved one, and it is a state-level tax only.

Gift taxes are self-explanatory: they are taxes paid on a gift received from another person while he or she is still alive. Many gifts are non-taxable, and certified estate planners and financial experts can help determine what combination of gifts, charitable contributions and other estate planning tools will yield the lowest tax burden and the greatest benefit to the recipients.

An Estate Tax "Vacation"

One of Congress' last acts of 2010 was to pass the Tax Relief, Unemployment Reinsurance and Job Creation Act of 2010. That landmark piece of legislation had implications far outside the sphere of estate taxes, but it still made a sweeping change to them. The Act revolutionized the way that estate taxes were collected, increasing the property exemption to an all-time high of $5 million.

What did that mean? That a person could inherit money, real property and other assets valued at up to $5 million before any estate taxes were due to the government. Likewise, a property owner could transfer that same amount of money (double the amount if the property is owned jointly) to another person without the estate being stuck owing inheritance taxes.

Is the Vacation Over?

At the end of 2012, the tax relief options passed into law in 2010 will expire. That means that unless Congress takes swift action to extend the Act, the estate tax exemption will lower back to $1 million, and the tax rate will skyrocket back up. Speaking with an experienced estate planner or tax attorney now will give you the opportunity to take advantage of historically favorable estate tax breaks before it is too late.