In the United States, some states collect an inheritance tax. In states that have an inheritance tax, the share of an estate inherited by an individual may be taxed. Inheritance tax may be applied to a bequest to devisees or beneficiaries of a will, an intestate share distributed to a decedent's legal heirs or to other types of transfers of estate property. Inheritance tax may also apply to life insurance payouts, annuities, and other types of property.An inheritance tax is different than an estate tax. An estate tax is a type of tax applied to the decedent's estate. Some states collect estate tax but no inheritance tax. A state can collect both types of taxes. For example, Maryland currently collects both inheritance tax and estate tax. These taxes are sometimes called death taxes. In addition to death taxes that may be collected at the state level, the federal government also has an estate tax.
Many people who receive an inheritance are not aware of the inheritance tax. Most people who know their state has an inheritance tax are not familiar with the details about how the inheritance tax is applied. Even in states that have an inheritance tax, it typically does not apply to all inheritances. Some exemptions are typically available. To determine if the tax will apply to an inheritance you may receive or to a distribution from your estate, you will need to know more about the relevant state inheritance tax laws. See state laws.In states that collect inheritance tax, the tax may apply to inheritances from estates of decedents that were domiciled in the state. When an estate is settled and there is a property transfer from the decedent's estate, inheritance tax may be owed. See
estate administration. Inheritance tax may also apply to property located in the state that was owned by a non-resident, unless such property is exempt from the inheritance tax.
Inheritance Tax and Estate Planning
Why should you be concerned about state inheritances taxes when making your estate plan? Several economists have predicted that during the next few decades we will witness the largest wealth transfer in history. While much of that transfer is expected to be the result of inheritances received by Baby Boomers from their parents, many Baby Boomers will also pass their wealth to their children during this time. The amount of money and property Baby Boomers are projected to inherit on average is substantial. If you are an heir or beneficiary, the issue of inheritance tax could be important to you because it is a tax on what you receive from an estate.When making a will or living trust, most people focus on estate taxes. However, if you reside in a state that levies an inheritance tax, there are estate planning strategies that can ensure more of your assets are passed to your beneficiaries rather than the government. Consult an estate planning attorney or tax advisor about the inheritance tax laws in your state for more information. Because inheritance tax may apply to any type of ownership interest held by a decedent at death, it is essential to have a licensed professional provide guidance on all types of property covered by your state's inheritance tax. If there are debts owed on assets in your estate, your children or other heirs may not inherit property you intend to pass down. Without the necessary cash or liquid assets in your estate, property may have to be sold to pay state and federal taxes. See need for liquidity in your estate plan.For more information on how to structure your estate plan with federal and state taxes in mind, see
other types of trusts.
When Is Inheritance Tax Due?
In states that collect an inheritance tax, it is generally due within a certain number of months after the death of the decedent. The due date for inheritance tax is not the same in all states.If you are the executor or personal representative of an estate, ensure you fulfill your duties to pay any inheritance taxes that may be owed. Refer to the executor checklist for a list of executor duties. If inheritance tax is owed on a bequest, distribution or transfer, contact a CPA or tax preparer promptly to ensure it is paid on time. Interest on unpaid inheritance tax can accumulate quickly. Also, some states may offer a reduction in the inheritance tax if it is paid early.
Inheritance Tax Exemptions
When calculating the amount of inheritance tax due, be aware each state has its own rules regarding tax exemptions. Some of the most common exemptions to inheritance tax are inheritances received by surviving spouses, bequests to charities or organizations with non-profit status, and property distributed by estates that fall within a small estates exemption. See probate of small estates. However, these exemptions vary by state and can change from year to year.Copyright 2020 Pennyborn.com. This article may not be copied, posted, rewritten, quoted or referenced without written authorization from the copyright owner.Updated on January 25, 2019.
States With An Inheritance Tax
The following is a list of states that have an inheritance tax as of January 1, 2019:
Many states are considering changes to their tax structures to discourage residents from moving to states where the tax burden is lower and they can leave more to their heirs and beneficiaries.
States With No Inheritance Tax
The following is a list of states that do not impose an inheritance tax as of January 1, 2019:
Also, the District of Columbia does not have an inheritance tax.
Note, this article only addresses inheritance taxes. It does not address estate taxes. Some states impose a state estate tax but do not impose an inheritance tax. There are different types of death taxes and they vary depending on the state.Tax laws change frequently. Because states are continuously making changes to their revenue programs and budgets, it is a good idea to review the inheritance tax and estate tax environment in your state on an annual basis. If out of state property is involved, check the tax laws of all states where property is owned. Consult a tax professional for the most up to date information.
Will You Have to Pay Inheritance Tax?
If you are concerned about the inheritance tax, here are some key points about this type of tax:1. Only a small number of states currently have an inheritance tax. The majority of U.S. states do not have an inheritance tax, although they may collect other types of death taxes, such as an estate tax. Source: http://pennyborn.com/2. In states that have an inheritance tax, there are usually some exemptions to the tax. For example, inheritances received by those with a closer familial relationship to the decedent, such as a surviving spouse or child, may be exempt from the inheritance tax or may be taxed at a lower rate. Conversely, estate property transfered to those with a more distant relationship to the deceased, such as a niece or nephew, may not be exempt or may be taxed at a higher rate, depending on state laws. Whether you will owe inheritance tax and the tax rate owed may depend on whether you are a spouse, domestic partner, child, parent, sibling or other relative of the deceased.3. To determine whether inheritance tax is owed, you will need to know how title to property is held. For example, was the inherited property owned solely by the deceased or was it owned jointly with another owner? In some states, property owned jointly with a spouse is exempt from inheritance tax. See joint tenants.4. Inheritance tax rates and exemptions are different from state to state.5. For information on whether inheritance tax was paid, contact the executor or personal representative of the estate.An estate planning lawyer can advise on which heirs, beneficiaries or transferees are exempt from the inheritance tax in your state. A lawyer can also review deeds, account registrations, and other estate documents to determine whether inherited property will be subject to inheritance tax and calculate the tax rate that will apply.
INFORMATION ON THIS SITE, INCLUDING ARTICLES, ESTATE PLANNING FORMS, AND THE ESTATE PLANNING BLOG, DOES NOT CONSTITUTE LEGAL, FINANCIAL OR TAX ADVICE. Pennyborn.com is not a law firm and is not a substitute for a lawyer. Your use of this site does not create an attorney-client relationship. Information on this site is for educational purposes only and may not be accurate, complete or up to date.
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