About inheritance tax: discuss the differences of an inheritance tax and estate tax. What are the inheritance tax exemptions? How to protect yourself from inheritance tax by creating a trust or gifting with a charitable gift annuity.
What is the Inheritance Tax Rate?
There is no such thing as a federal inheritance tax rate. The inheritance tax is imposed on a state level, and not all states have one. For example, Texas does not impose an inheritance tax, and some states refer to an estate tax and an inheritance tax as the same thing even though they are technically very different.
Other terms you may hear used in place of inheritance tax are “death duty” in the United Kingdom, “estate duty” in Hong Kong, or “stamp duty” in Bermuda. Some places such as Australia and the British Virgin Islands do not currently have an inheritance tax nor have they ever had one.
Difference of an Estate tax and Inheritance Tax
The difference between the estate tax and the inheritance tax lies with who is actually responsible for paying the taxes owed.
Who Pays the Estate Tax?
With an estate tax it is the responsibility of the Administrator, or Executor, of the estate to pay the taxes. The taxes are calculated based on the entire value of the estate, and if the Administrator cannot pay the taxes out of the estate’s value then it becomes the responsibility of the heirs to pay the taxes. The federal government will impose this tax according to established guidelines which include the value of the estate.
Who Pays the Inheritance Tax?
An inheritance tax is the individual responsibility of each heir. Determining the financial responsibility of the heirs for the inheritance tax is based on several key factors.
What is the Inheritance Tax Rate? It Depends…
The inheritance tax rate varies depending on the relationship of the heir to the deceased (decedent). Each state may determine this rate, and if the heir is a distant relative or friend the inheritance tax rate will be much higher than if the heir is a spouse or child of the decedent.
A child may be entitled to an exemption of the first $3000 of their inheritance and be responsible for only a 7.5% tax on inheritance valued over $100,000. In contrast, a friend of the decedent may be taxed as much as thirty percent and only receive a tax exemption on the first hundred dollars.
Another consideration state government will make when determining the inheritance tax rate will be the fair market value of the property being transferred. Fair market value is not what it would cost to replace the property, but what you would be able to sell the property for if needed.
What are the Inheritance Tax Exemptions?
Your heirs may receive tax exemptions for taxes that have already been paid on the property and it is important to have all documents in a readily accessible location to prove that little or no debt is owed upon your death. If any of the inheritance has been designated for charitable organizations your heirs will not be held accountable for paying an inheritance tax on this portion of the estate.
Fraudulent Income Tax Returns Rise to Avoid Inheritance Tax
Opponents of the inheritance tax feel that in addition to an estate tax, the inheritance tax is harmful to families who may need the money immediately and cannot afford to pay harsh taxes imposed on them during an already emotionally difficult time. Critics also feel that taxes such as these encourage individuals to file fraudulent income tax returns by placing their money into annuities both on and offshore, and to establish trusts for their heirs to remove large amounts of property from their listed estate.
Call Estate Street Partners if you wish to know more about how to reduce your estate tax, eliminate your inheritance tax, possibly eliminate some of your income tax and learn how to strategize your money and assets to be in compliance with the IRS and federal and state-specific regulations. Estate planning can be complex and taking the route of doing it yourself can lead to severe financial penalties.
Seek Knowledgeable and Professional Estate Planning Advice from Estate Street Partners
Inheritance tax information can be obtained by seeking the services of a knowledgeable estate planner. Since each state differs in the amount taxed to heirs, an estate planner will be able to provide accurate information involving up-to-date tax laws and ways to protect assets.
One of the more common means of protecting inheritance from taxes is to place money into trusts and elect a trustee to transfer the property to your beneficiaries upon your death. Once money has been allocated into a trust it is removed from you listed estate and upon your death it will be distributed to your heirs free from estate and inheritance taxes.
Some people also choose to give their money in the form of gifts to organizations and establish a charitable gift annuity. Receiving money from an annuity protects your heirs from paying any inheritance tax, although they may still be responsible for an early withdrawal penalty from the IRS. Failure to consult with an advisor could result in unnecessarily high taxes for your heirs. Again please seek professional advice on these important financial matters.
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