“Death taxes” is a general phrase referring to various taxes imposed by the government on large transfers of property or money upon an individual’s death. Death taxes are commonly known by other names such as “estate taxes” or “succession taxes.” Federal and state laws covering estate taxes are frequently undergoing many changes and amendments. Fortunately, many estates are not large enough to have such a tax imposed on them.
A more specific form of a death tax is called the “inheritance tax.” This is a tax that must be paid by people who receive property or assets from an estate after a person passes away. In contrast to estate tax laws, federal laws generally do not cover inheritance taxes.
Instead, inheritance tax laws are controlled by the states and will vary according to the location where the estate holder died and where their will documents were created/executed. Estate taxes are much broader than inheritance taxes and can cover circumstances and situations outside of transfers to beneficiaries.
Inheritance taxes are taxes on property received by an heir when the property owner dies. This is usually a family member or a close friend who was listed in the person’s will document. Inheritance taxes are usually calculated according to the amount or value of the property received by the heir or beneficiary, as well as the heir’s relationship to the decedent.
Basically, inheritance taxes are a general tax on the beneficiary’s right to receive the property. In addition, a court may use several other factors to calculate inheritance taxes, including:
- Any outstanding debts left over by the decedent;
- Whether the decedent has previously made certain transfers to charitable organizations;
- Whether they made transfers to their spouse; and
- Whether the decedent claimed certain losses, such as investment or theft losses.
Again, the calculation of inheritance taxes varies widely by state law. Most states will require that the estate have a minimum worth before taxes are levied against the estate. For instance, if the estate is below the minimum value, then inheritance taxes will not be required.
Moreover, not all states specifically impose an inheritance tax. For states that do impose inheritance taxes, the maximum percentage may vary widely. For instance, the percentage in Maryland may range from 10 to 16%. In contrast, the death tax in Washington may reach as high as 19%.
Inheritance taxes can present a great financial burden on the beneficiary. This is also true for any person who is receiving property upon a person’s death. Oftentimes, the tax requirements can outweigh the benefit of actually transferring assets through an estate distribution. There are many steps that a person can take to ensure that death tax liability is minimized for the various beneficiaries involved.
Some approaches for reducing inheritance and estate taxes include:
- Transferring assets prior to death through financial and legal mechanisms such as sale agreements, partnership arrangements, or gifts;
- Buying life insurance for the estate holder, which may serve to offset some costs;
- Inquire about different inheritance and estate tax payment options; and
- Create a family trust; this sometimes allows transfers to be made to family members at less than full value.
However, you want to be sure that if you want to minimize your tax liability, that you don’t just try to avoid your tax liability. If you legally owe taxes then it is in your best interest to pay them. Do not try to evade taxes. The above are legal steps you can take to minimize your tax liability and are not illegal.
As with any type of tax, inheritance and death taxes may be associated with various legal issues, disputes, and violations. These may vary from case to case, as each estate will be different from the next. Also, as mentioned, the tax laws will vary from state to state.
Some common legal issues that are associated with inheritance and death taxes may include:
- Tax Evasion or Tax Fraud: As mentioned above, while it is generally permissible to take legal steps to minimize liability in connection with death taxes, it is not legal to use fraud or other means to affect one’s tax liability.
- For instance, if a person takes steps to purposely deceive or defraud the government or tax agents with regard to death taxes, this can lead to legal liability. In many cases, criminal consequences can also result. This may lead to criminal punishments such as fines and other consequences.
- Non-Payment of Taxes: Non-payment of inheritance or death taxes can also lead to consequences. The party responsible for handling the payments may also face legal consequences if the taxes are purposely not paid for in the correct manner.
Planning an estate is not a simple task, and can often be complex. Unlike income taxes, death taxes are calculated in regards to the person’s entire lifetime and estate, and can cover a vast amount of property and assets. While the tactics above to minimizing tax liability can be grasped, executing them requires expertise.
Therefore, when dealing with inheritance taxes and their consequences, it is to your advantage to speak with a wills, trusts, and estates lawyer in your area for advice. A lawyer near you can explain to you the inheritance tax laws of your state and inform you as to ways to avoid high tax liabilities in connection with an estate.