There are terms that are used in the field of estate planning that can sound interchangeable, and this can lead people to misguided beliefs. This dynamic enters the equation when it comes to death taxes.
You may assume that an inheritance tax and an estate tax are identical. The idea is that these are just two different terms that can be used to describe the same thing.
If you are not an estate planning professional, this assumption may make sense, because they do sound quite similar. In reality, an estate tax and an inheritance tax are two entirely different forms of taxation.
When you talk about taxes that can impact your estate, there are federal taxes, and there are also a state-level taxes in some states. On the federal level, there is no inheritance tax at all.
This is a type of tax that would be imposed on transfers to each person who is receiving an inheritance who is not exempt from the tax. As a result, there could be multiple different impositions of the tax after one person dies.
Though there is no federal inheritance tax to contend with, there are a few states in the United States that have state-level inheritance taxes. We practice law in the state of California, and though we face our fair share of taxation in the Golden State, we do not have to worry about an inheritance tax. There is no state-level inheritance tax in our state.
There are just six states in the union that still have inheritance taxes. These states are Nebraska, Kentucky, Iowa, Pennsylvania, Maryland, and New Jersey.
People in these states are faced with an added layer of taxation, but fortunately, close relatives are exempt from the tax in most states. For example, in the state of New Jersey, Class A beneficiaries are completely exempt. Spouses, parents and grandparents, children, stepchildren, and grandchildren are exempt from the New Jersey inheritance tax.
Now that we have explained what an inheritance tax is all about, we can look at estate taxes. There is a federal estate tax that is applicable in all of the states, and it comes with a 40 percent top rate. It can be applied on transfers to anyone except your spouse. There is an unlimited marital deduction that allows for unlimited transfers between spouses, provided the people involved are American citizens.
Everything that is transferred is not subject to the federal estate tax, because there is an exemption or exclusion that allows you to transfer a certain amount tax-free. During the current calendar year, the amount of this exclusion is $5.45 million.
An estate tax is not applied on individual transfers to multiple inheritors who are not exempt. If it is a factor, it is levied on the total taxable portion of the estate in question before the inheritors receive their bequests.
There are 14 states in the union that have state-level estate taxes, but once again, we are fortunate in California. There is no estate tax on the state level in our state.
However, there is something else to take into consideration when it comes to state-level estate taxes. If you own valuable property in one of these 14 states or the District of Columbia, the estate tax in that state would be applicable after you pass away.
This is something to assess when you are devising your estate plan from a tax planning perspective. If you would like to see a list of the states that have state-level estate taxes, visit this page: States With State-Level Estate Taxes.
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If you have come across this blog post, you are probably concerned about how taxation can impact your estate. Without question, death taxes can take a heavy toll if your estate is in taxable territory. Plus, you may have questions about other forms of taxation.
There are steps that you can take to position your assets in the optimal manner if taxation is a concern for you. The ideal strategy will depend upon the circumstances, and there are many different ways to proceed.
The key to a properly constructed estate plan is communication. If you work with an estate planning attorney that you feel comfortable with, your lawyer can gain an understanding of your family dynamic and your estate planning objectives. Your financial position will be carefully evaluated, and the appropriate recommendations will be made.
Our firm can help if you are ready to get started. You can send us a message through our contact page to set up an appointment, or you can give us a call at 916-437-3500.