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Estate & Inheritance Tax Basics

When many think of estate planning, they think of the drafting of wills, powers of attorney, trusts, etc. But a critical component to all of these documents is the estate tax. While some states have inheritance and estate taxes, others do not. But what is important to remember is that when you leave something to a beneficiary, they, in turn, are responsible for any associated taxes and fees–especially if you do not plan accordingly. Clark Olson Law explains.

What is the estate tax?

An estate tax is a seizure on estates whose value exceeds a limit set by law. Only the amount that exceeds the limit is taxable. All states must abide by federal estate tax regulations; however, only some states have additional estate and inheritance taxes.

The federal estate taxes are calculated by the estate fair market value, not what the deceased originally paid for it. The tax is then levied by the state in which the deceased person was living at the time of their death.

However, the beneficiary does not pay the estate tax; it comes out of the estate itself. This is unlike the inheritance tax.

As of 2020, only estates valued at $11.58 million or more are subject to federal estate tax.

In addition to federal estate taxes, some states* have estate taxes, too. This is often a much smaller threshold than the federal estate tax limitations. These states include:

  • Connecticut ($3,600,000)
  • District of Columbia ($5,600,000)
  • Hawaii ($5,500,000)
  • Illinois ($4,000,000)
  • Maine ($5,600,000)
  • Massachusetts ($1,000,000)
  • Maryland ($5,000,000)
  • New York ($5,000,000)
  • Oregon ($1,000,000)
  • Minnesota ($2,700,000)
  • Rhode Island ($1,561,719)
  • Vermont ($2,750,000)
  • Washington State ($2,193,000).

*The number in parentheses is the threshold minimums at which the state estate taxes apply.

What is the inheritance tax?

Inheritance tax is a state tax the beneficiary must pay once property or assets have been passed down to him or her. The inheritance tax is calculated separately for each beneficiary and paid individually.

This is important because each state has its own inheritance tax rates. It is critical to note that such taxes only apply to the state in which the deceased was from. So, if a Pennsylvania resident dies and left a beneficiary from Utah the estate, the beneficiary would still need to pay the Pennsylvania estate taxes.

However, not all states have an inheritance tax. Those that do include:

  • Nebraska
  • Iowa
  • Kentucky
  • Pennsylvania

In addition, Maryland and New Jersey have both inheritance and estate taxes.

How can I reduce or limit the amount of taxes my estate or beneficiaries will be subjected to upon my passing?

Depending on the size of your estate, you may worry that your beneficiaries will be left with burdens instead of a blessing upon your passing.

However, there are estate planning options that exist that can enable you to limit the amount of applicable taxes. At Clark Olson Law, we can advise you on the estate tax, gift tax, and generation-skipping tax issues.

Estate Planning: Estate & Inheritance Taxes

Planning for the future can be complicated. But when you add in large estates, there are tax concerns you may have. Don’t let those feelings overwhelm you. At Clark Olson Law, we will help you navigate the estate and inheritance tax process so your family is prepared for the future. Contact us today to schedule an appointment.

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