For most people, one of the primary incentives for working hard and accruing assets over the course of a lifetime is to be able to pass those assets down to the net generation. This is also why create a comprehensive estate plan is so important — to ensure that those assets are passed down as intended when you die. One concern you may have when it comes to passing down your assets is the impact taxes will have on the transfer of those assets. Specifically, you may be worried that your beneficiaries will be faced with inheritance taxes as a result of the assets you leave them. This is a common concern; however, usually an unwarranted one. A better understanding of how federal gift and estate taxes as well as state inheritance taxes work will help put your mind at ease.
Transferring Wealth at the Time of Death
When you die, you will leave behind an estate that is made up of all the assets you own, or in which you had an ownership interest, at the time of your death. All of those assets must be transferred to a new owner one way or another. The simplest, and most common, method is through a gift made in a Last Will and Testament. At one point in time, not all that long ago, wealthy families favored the use of a trust to transfer wealth from one generation to the next specifically because, at that time, ta loopholes allowed them to avoid paying taxes on the transfer. The government, however, finally caught on and closed those loopholes.Today, whether you pass down your assets as gifts in a Will, through the provisions of a trust, or in any other manner, you will potentially be subject to taxation on the transfer.
Gift and Estate Taxes vs. Inheritance Taxes
One of the most common misconceptions in estate planning is found in the distinction between federal gift and estate taxes and state level inheritance taxes. Federal gift and estate tax is a tax that is levied on an estate after the death of the estate owner. When you die, for example, your estate will have to go through the legal process known as probate. During the probate process, the value of your estate assets will be determined. That total is then combined with the value of any qualifying gifts made during your lifetime to determine what is subject to federal gift and estate taxes. That tax bill must then be paid by your estate before any remaining estate assets are transferred to their new owners. The important point to understand is that federal gift and estate axes are due and payable at the time of the transfer of wealth and are paid out of the estate assets. An inheritance tax, while similar to the gift and estate tax, is not the same thing. As the name implies, an inheritance tax taxes an inheritance received by a beneficiary as opposed to taxing the gift made by the giftor. While both gift and estate taxes and inheritance tax the transfer of wealth, gift and estate taxes are paid by the estate of the person making the gift while inheritances taxes are paid by the beneficiary of the gift.
Does North Dakota Have an Inheritance Tax?
Only a handful of states levy a state level estate tax or a true inheritance tax. Fortunately, the State of North Dakota is not one of them. Therefore, if you gift assets to loved ones, or other beneficiaries, in the State of North Dakota you will not have to worry about your beneficiaries incurring a state level estate or inheritance tax. Any tax due on the transfer of wealth as a result of your gift will be incurred and paid by your estate during the probate of your estate following your death. If, however, you plan to make gifts to beneficiaries who are residents of other states it is best to consult with your North Dakota estate planning attorney to be sure that your beneficiary’s state of residence is not one of the few that does require payment of an inheritance tax.
For more information, please join us for one of our upcoming free seminars. If you have additional questions about inheritance or estate taxes in the State of North Dakota please contact the experienced estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.