“Death taxes” is a general 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.” Federal and state laws covering estate taxes are frequently undergoing many changes, but fortunately, many estates are not large enough to have such a tax imposed on them.
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
For states that do impose inheritance taxes, the maximum percentage will vary. Below is an incomplete list outlining a maximum percentage of several of the state's that have a death tax.
- Kentucky: 16%
- Iowa: 15%
- Maine: 12%
- Maryland: 10-16%
- Massachusetts: 16%
- Minnesota: 16%
- Nebraska: 18%
- New Jersey: 16%
- Oregon: 16%
- Pennsylvania: 15%
- Tennessee: 9.5%
- Washington: 19%
- Washington, D.C.: 16%
What Can Be Done to Minimize Inheritance Tax Liability?
- 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
- Create a family trust which sometimes allows transfers to be made to family members at less than full value