The taxes that can be imposed on inheritance distributions are often misunderstood. People sometimes assume that certain terms are interchangeable, when in reality, they are not. Let’s look at some of the facts with regard to taxation and your estate plan.
Before we get into an explanation of inheritance taxes, we should examine taxation in general from an overview.
First, let’s look at the most common question that would probably pop into your mind. When you leave inheritances to your loved ones, will they have to report the bequests as taxable income?
The answer to this question is probably surprising given the fact that the tax man is always looming around the next corner. In fact, an inheritance is not considered to be taxable income, so for once, we can pass along some good news about taxation.
There is also the matter of the step-up in basis. Capital gains taxes are applicable when appreciated assets are sold. This can make you wonder about inherited appreciated assets. In fact, if you inherited assets that appreciated during the life of the person who left you the inheritance, you would not be responsible for the gains. You would be responsible for future gains if the assets continue to appreciate after you acquire them and you sell the assets.
Inheritance Tax
Now we can move on to inheritance taxes. You may assume that the term “inheritance tax” is simply another way of talking about an estate tax. This is not the case. These are two different types of taxation that can enter the picture when someone passes away.
An inheritance tax is applied on transfers to each individual inheritor when the estate is being administered, but close some familial relationships are often exempt. So, this type of tax could be levied multiple times on one estate.
In fact, there is no inheritance tax on the federal level. There are a handful of states in the union that impose state-level inheritance taxes. We practice law in the state of North Dakota, and fortunately for us, there is no state-level inheritance tax in our state.
If you want to make sure that you steer clear of inheritance taxes if you decide to move at some point in time, Maryland, New Jersey, Pennsylvania, Iowa, Nebraska, and Kentucky are the states that have state-level inheritance taxes.
Estate Taxes
Unlike an inheritance tax, an estate tax is not going to be applied multiple times on one estate. This type of tax is levied on the entire taxable portion of an estate before it is distributed to the heirs. Whatever was left after the tax was applied would be distributed among the heirs in accordance with the wishes of the decedent.
On the federal level, we do have an estate tax in the United States. The majority of families are not going to have to worry about the tax, because the credit or exclusion is in excess of $5 million. It stands at $5.45 million in 2016. This is the amount that can be transferred before the estate tax would be applied.
As a resident of our area, you do have to consider the value of your property when you are trying to determine the value of your estate. Many people around here own farms and ranches, and the vast tracts of land can sometimes be worth millions of dollars, even if the families that work the land consider themselves to be ordinary people who are not extremely wealthy.
Though there would be just one imposition of the estate tax when an estate is being administered, residents of some states could potentially face estate taxes on the federal level and the state level. There are 14 states that impose state-level estate taxes. The District of Columbia also has its own estate tax.
If you live in North Dakota, you are in the clear unless you own property in a state that has an estate tax, because there is no North Dakota state estate tax.
There are things that you can do to reduce your estate tax burden if your estate is going to be subject to taxation. Your estate planning attorney can gain an understanding of your situation and advise you accordingly if you are looking for solutions.
Attend a Free Seminar
You can gain a broad understanding of the estate planning process in one sitting if you attend one of our seminars. We offer seminars to people in the greater Grand Forks area on an ongoing basis, and these sessions are free to attend.
To obtain more details and registration information, click this link: Free Estate Planning Seminars.
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