One of the reasons that most of us work hard and save wisely throughout the course of our lives is so that we will have something to leave behind to provide for our loved ones when we are gone. If you are planning to pass down assets to your children in your estate plan, you undoubtedly want to maximize the value of the estate you leave them. One mistake you definitely want to avoid is failing to consider the impact taxes will have on the value of your estate. You may already know that all estates are potentially subject to federal gift and estate taxes; however, have you how any state level taxes will affect the value of your estate? Do you know whether your children will have to pay a North Dakota inheritance tax and/or whether North Dakota imposes a state level estate tax? In order to accurately determine the value of the estate your children will be left with you need to know which of these taxes, if any, will be levied on the estate after your death.
Federal Gift and Estate Taxes
When you die, all of your assets will be identified, located and valued by your Executor as part of the probate of your estate. The primary reason a date of death value is required for all estate assets is because all estates are potentially subject to federal gift and estate taxation. Federal gift and estate taxes are levied – at the rate of 40 percent — on the combined value of all assets owned by you at the time of your death and all qualifying gifts made during your lifetime. Fortunately, all taxpayers are entitled to exempt up to the current lifetime exemption amount before the tax attaches to an estate. For 2016, the lifetime exemption limit is $5.45 million, meaning your estate will not incur federal gift and estate taxes unless the value of the assets owned at the time of your death combined with the value of any lifetime gifts exceeds that amount.
Does North Dakota Impose an Estate Tax?
Every estate is potentially subject to federal gift and estate taxes without regard to where the estate is located. An estate may also be subject to state estate taxes in addition to federal estate taxes if the estate is located in a state that imposes estate taxes. An estate could avoid federal estate taxation yet be subject to state estate taxes, depending on the exemption limits. For example, imagine that your estate assets are valued at $4 million and you made lifetime gifts valued at $1 million. Using the lifetime exemption of $5.45 you will avoid federal gift and estate taxes; however, you could owes state estate taxes if your estate is located in a state with an estate taxes and with an exemption limit less than $4 million. Fortunately, North Dakota does not impose an estate tax. If any of your estate assets are located in another state – for example a vacation home – be sure to check with your North Dakota estate planning attorney to see if any state estate taxes will be imposed on that asset.
Does North Dakota Impose an Inheritance Tax?
There is yet another tax you need to take into consideration when passing down your estate to your children (or any other beneficiary) – inheritance taxes. Do not confuse estate taxes with inheritance taxes. They are related but not the same. An estate tax is imposed on the estate of a decedent. Therefore, estate taxes, whether they are federal or state, must be paid by the estate prior to the transfer of assets out of the estate. An inheritance tax, on the other hand, is imposed on the beneficiary of the assets. Therefore, an inheritance tax is paid by the beneficiary after the assets are transferred out of the estate and into the name of the beneficiary. It is possible for an estate to be subject to both federal and state estate taxes and an inheritance tax. Only a handful of states still have an inheritance tax in place and North Dakota is not one of them. Therefore, if your children live in North Dakota you do not need to worry about an inheritance tax affecting the value of the estate you pass down to them.
If you have additional questions about the North Dakota inheritance tax contact the experienced Grand Forks estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.
- Estate Planning for Parents of Young Children - May 14, 2020
- Estate Planning Terms You Need to Know - April 23, 2020
- Steps You Can Take to Decrease the Odds of a Challenge to Your Will - February 7, 2019