Death Taxes: Inheritance Tax Liability
Authored by Ken LaMance
, LegalMatch Law Library Managing Editor and Attorney at Law
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What are “Death Taxes”?
“Death taxes” is a general legal phrase referring to a tax imposed by the government on large transfers of property or money upon an individual’s death. Death taxes are commonly known as “estate taxes”
or “succession taxes”. Most estates are not large enough to have the tax requirement imposed on them. Federal laws covering estate taxes are currently undergoing major revisions and are expected to solidify after the year 2011.
A more specific form of a death tax is the “inheritance tax”. This is a tax that is levied on persons who receive property from an estate upon the death of the transferring person. In contrast to estate tax laws, federal laws do not cover inheritance taxes.
Instead, inheritance tax laws are implemented by each individual state, and will vary according to the location where the estate holder became deceased. Estate taxes are much broader than inheritance taxes and can cover situations outside of transfers to beneficiaries.
How are Inheritance Taxes Calculated?
Inheritance taxes are taxes on property received by an heir upon the decedent’s death. This is usually a family member or a close friend who was listed in the person’s will. Inheritance taxes are usually calculated according to the amount of property received by the heir or beneficiary, as well as the heir’s relationship to the decedent. Basically, inheritance taxes are a tax on the beneficiary’s right to receive the property.
In addition, a court may use other factors to calculate inheritance taxes, including:
- Any outstanding debts held by the decedent
- Whether the decedent made certain transfers to charitable organizations
- Whether they made transfers to a spouse
- Whether the decedent claimed losses, such as casualty or theft losses
Again, the calculation of inheritance taxes varies widely by state. Most states will require that the estate have a minimum worth before taxies are levied, such as $650,000. If the estate is below the minimum value, then inheritance taxes will not be required. Not all states impose an inheritance tax.
For states that do impose inheritance taxes, the maximum percentage which may be taxed according to state is as follows:
· Delaware: 16%
· Kansas: 15%
· Kentucky: 16%
· Indiana: 15%
· Iowa: 15%
· Maryland: 10%
· Massachusetts: 16%
· Michigan: 17%
· Mississippi: 16%
· Montana: 32%
· Nebraska: 18%
· New Hampshire: 15%
· New Jersey: 16%
· North Carolina: 17%
· Ohio: 7%
· Oklahoma: 15%
· Pennsylvania: 15%
· South Dakota: 30%
· Tennessee: 13%
What can be done to Minimize Inheritance Tax Liability?
Inheritance taxes can present a great financial burden on the beneficiary or any person who is receiving property upon a person’s death. Oftentimes, the tax requirements can outweigh the benefit of actually receiving assets through an estate distribution. There are many steps that a person can take in conjunction with their family to ensure that death tax liability is minimized for the beneficiaries.
- Transfer assets prior to death through mechanisms such as sale agreements, partnership arrangements, or gifts
- Buy life insurance for the estate holder, which may serve to offset some costs
- Inquire about inheritance and estate tax payment options- there may be different payment options such as installment payments for the taxes
- Create a family trust which sometimes allows transfers to be made to family members at less than full value
In general, the main goal in minimizing tax liability is to make the value of the estate as small as possible. Although this can be done through a variety of means, estate planning involves a great deal of expertise and foresight. Thus, when planning an estate, it is almost always necessary to consult with an estate lawyer to determine the best options.
Do I Need a Lawyer for Issues with Inheritance Tax Liability?
As you can see, planning an estate is not a simple tax. Unlike income taxes, death taxes are calculated in regards to the person’s entire lifetime, and can cover a vast amount of property and assets. Therefore, when dealing with inheritance taxes and their consequences, it is to your advantage to speak with an estate attorney for advice. A lawyer can explain to you the inheritance tax laws of your state in a way that will benefit you the most.
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Last Modified: 01-04-2011 11:41 AM PST
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