Taxes are a part of life. They are also a part of death. And frustratingly, if we’re not careful in life, we can pass them on to our loved ones in death through inheritance taxes!
Inheritance taxes must be paid for all gifts received as part of an inheritance or trust. The amount of tax will be determined by the value of what is collected, whether it is cash, real estate, or any other item of value. Some gifts you receive may be eligible for tax exemptions that will significantly reduce or even eliminate the tax you may have otherwise had to pay.
Estate Tax vs. Inheritance Tax
Estate tax and inheritance tax are two different things. While they are both paid to the IRS, the most significant difference is with who pays them. The estate pays estate taxes and covers any taxes that are levied against the assets included in the deceased’s estate. Inheritance tax is paid for by the people who are inheriting an asset. You may be able to set aside an exclusive account that can be used to help defray the cost of the inheritance tax so that your loved ones won’t be responsible for the entire amount.
You can also avoid inheritance tax by using certain types of trusts.
How Is Inheritance Tax Calculated?
Inheritance Taxes will be different for each beneficiary and must be calculated separately after all of the assets have been dispersed. The amount of inheritance tax varies from state to state and can range from 1% up to 20%. Some states will only tax a portion of your inheritance.
For example, if you are given a bequest of $10 million and the state taxes anything above the first $2 million, you would only have to pay tax on the $8 million over the exempt amount. It’s important to talk to the administrator of the will or a lawyer who handles estate law so that you fully understand what the tax rate is for your state and how to fill out the inheritance tax form once you receive your inheritance.
Inheritance Tax Exemptions
Not all inheritances are taxable. States that have an inheritance tax allow for a certain amount of money to be received without having to pay an additional tax. Several states offer tax exempt status to the deceased person’s spouse. Children may also qualify for this exemption. There are instances, however, in which the amount received is large enough to put the inheritance into a taxable category. The main rule of thumb is that family members usually bear some degree of tax-exempt status. The beneficiaries who have no family connection to the deceased can expect to pay a much higher inheritance tax.
As a person who is planning their estate, if you want to prevent your beneficiaries from paying any inheritance tax, you may want to look into placing your assets into trusts. This action allows you to leave whatever item or amount of money you want to any person, family or not, and possibly reduce the amount of inheritance tax they are required to pay once they receive their gifts.
Ask Yana Feldman & Associates!
Understanding how inheritance tax works can be tricky unless you are familiar with your state’s tax laws. It’s essential when dealing with any estate laws to have a trusted attorney you can rely on to answer all of your questions. Yana Feldman & Associates have the experience and knowledge necessary to answer your questions and make sure you are fully informed about how your will works and what type of inheritance tax your heirs may be responsible for. Our New York legacy lawyers team can write your will and create trusts that will prevent your beneficiaries from having to pay exorbitant taxes on the gifts they receive. Call at your earliest convenience to learn about inheritance taxes and how they may affect you!