Death taxes refers to the various taxes which are imposed by the government on a large transfer of property or money upon the death of an individual. Death taxes are also commonly known by other titles, such as succession taxes or estate taxes.
The state and federal laws which govern estate taxes are continuously undergoing amendments and revisions. Fortunately, however, the majority of estates are not large enough for the death taxes to apply and be imposed on the estate.
One specific type of death tax is called an inheritance tax. This is a type of tax which must be paid by individuals who receive assets or property from an estate after an individual passes away.
Generally, federal laws do not cover inheritance taxes, which is in contrast to estate laws. Instead, inheritance tax laws are governed by the states and vary according to the state in which the estate holder passed away and the state in which their will documents were created and executed.
Estate taxes is a much broader category of taxes than inheritance taxes and may cover situations and circumstances outside and in addition to a transfer to a beneficiary. The federal government may only tax an individual’s estate if the gross value of their estate exceeds the lifetime exclusion.
For the year 2021, the federal estate tax threshold is $11.7 million. For a married couple, this is doubled, which means they can protect up to $23.4 million.
It is also important to note that federal estate tax laws provide a marital deduction. Pursuant to this deduction, the decedent’s estate may pass to their surviving spouse tax free.
That property, however, then becomes part of the estate of the surviving spouse. This means that the value of the estate which exists when the second spouse passes away may be subject to federal or state taxation.
As of 2020, states which collect an inheritance tax include:
- New Jersey; and
States which collect an estate tax include:
- New York;
- Rhode Island;
- Washington; and
- Washington, D.C.
How are Inheritance Taxes Calculated?
An inheritance tax is a tax that is imposed on property which is received by a beneficiary or an heir after the property owner passes away. The beneficiary or heir is typically a family member or a close friend of the deceased who was listed in their will document.
An inheritance tax is typically calculated according to the value or amount of property which is received by the beneficiary or heir as well as the relationship of the heir to the decedent, or the individual who passed away.
An inheritance tax is essentially a general tax on a beneficiary’s right to receive property from an estate. There are several factors which a court may examine in order to calculate inheritance taxes, including:
- Any outstanding debts which were left over by the decedent;
- Whether the decedent previously made transfers to charitable organizations;
- Whether or not the decedent made transfers to their spouse; and
- Whether the decedent claimed certain losses, such as theft losses or investment losses.
It is important to note that the calculation of inheritance tax varies widely by state. The majority of states require that the estate have a minimum value prior to levying taxes against the estate. If the value of an estate is below this minimum value, inheritance taxes will not be required.
Additionally, it is important to note that not all states impose an inheritance tax specifically. For those states which do impose an inheritance tax, the maximum percentage can vary greatly.
For example, the maximum percentage in the State of Maryland may range from 10% to 16%. The maximum percentage in Washington State, in contrast, may be as high as 19%.
Can Anything be Done to Minimize Inheritance Tax Liability?
An inheritance tax may present a substantial financial burden on the beneficiary. This also applies to any individual who is receiving property upon the death of another individual
In many instances, the tax requirements may outweigh the benefits of actually transferring assets using an estate distribution. There are numerous steps which an individual can take to ensure that death tax liability is minimized for the beneficiaries who are receiving property or assets.
There are several possible approaches to reducing inheritance and estate taxes, which may include:
- The transfer of assets prior to an individual’s death using financial and legal mechanisms such as:
- sale agreements;
- partnership arrangements; or
- Purchasing life insurance for the estate holder, which may serve to offset some of the costs;
- Inquiring about different inheritance and estate tax payment options; and
- Creating a family trust, which sometimes allows transfers to be made to family members at less than full value.
If an individual wants to ensure that they minimize their tax liability, it is important not to attempt to avoid their tax liability by evading taxes. If an individual legally owes taxes, it is in their best interests to pay those taxes.
What are Some Other Issues Connected with Inheritance Taxes?
As with any types of taxes, inheritance and death taxes are often associated with various legal violations, disputes, and issues. It is important to note that the issues may vary from case to case and that each estate is unique and different from the next.
As previously noted, tax laws vary from state to state. Common legal issues which are often associated with inheritance and death taxes may include:
- Tax evasion or tax fraud; and
- The non-payment of taxes.
Tax evasion or tax fraud involves an individual’s attempt to avoid paying taxes altogether. As noted above, there are steps an individual can take to legally minimize their liability connected with inheritance and death taxes.
However, it is not legal to use fraud or another similar means to reduce an individual’s tax liability. For example, if the individual takes intentional steps to purposely defraud or deceive the government or a tax agent with regard to death taxes, it may lead to legal liability.
In many cases, this type of fraudulent behavior can result in criminal consequences. These consequences may lead to criminal punishments which may include fines or various other punishments.
The non-payment of inheritance or death taxes by an individual may also lead to consequences. The party who is responsible for handling the payment of taxes may also face legal consequences if the taxes are intentionally not paid for in the correct manner.
Do I Need a Lawyer if I Have Issues with Inheritance Tax Liability?
It is essential to have the assistance of an estate lawyer for help with any issues surrounding inheritance tax liability. Planning an estate is often a daunting and complex task.
In contrast to income taxes, death taxes are calculated in relation to an individual’s entire lifetime and estate and may cover a vast amount of assets and property. While there are tactics like those mentioned above which can be used to minimize tax liability, executing those tactics often requires expertise.
Because of this, it is in your best interest to speak with an attorney for any issues regarding inheritance taxes and their consequences, whether you are trying to plan and minimize the burden on your loved ones when you pass, or you are receiving assets from an estate yourself. Your attorney can explain the inheritance tax laws in your state and help you plan to minimize your liability.