Since estate planning is not on the minds of most people day to day, it is best to hire a lawyer who specializes in estate planning. An estate planning lawyer is a lawyer who has the education and experience to advise clients on preparing their affairs for incapacity and death. This preparation includes taxes and tax issues associated with estate planning.
There are generally 3 types of taxes associated with estate planning: inheritance taxes, estate taxes, and income taxes.
Inheritance Taxes
Inheritances taxes come out of the pocket of the beneficiary who is inheriting. Often, the tax will have to be paid before the inheritance is even distributed, so the amount the beneficiary receives may already be reduced by the due taxes.
Only a few states tax inheritances: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. All states exempt property passing to a surviving spouse from inheritance taxes, and often children are exempt as well.
Each state has their own rules on the size of the estate and types of assets that are subject to inheritance taxes.
Estate Taxes
Estate taxes are paid by the deceased’s estate. Essentially, it is a tax on the right to transfer property when someone dies. Many estates will never actually pay this tax. As of 2018, the IRS exempts estates valued at less than $11.2 million per person, which puts the exemption at $22.4 million for married couples. Estates valued higher than the exemption rates are taxed at 40%.
While estate taxes are usually imposed by the federal government, some states collect estate taxes as well. The states that do often have much lower exemptions thresholds than the IRS. However, as with inheritance taxes, if the deceased did not live or own real property in one of the states that collects estate taxes, then the beneficiary won’t owe any state estate taxes even if they live in one of these states.
Income Taxes
Inheritances themselves are not considered income, and therefore a beneficiary won’t have to report that money on a state or federal tax return. However, if the beneficiary received property from the estate that traditionally has income tax consequences, like retirement accounts, real estate, stocks, etc., the beneficiary may have to include this information on state and federal tax returns.
If a beneficiary decides to sell the real estate and stocks, the beneficiary must pay taxes on the difference in value of the asset between when they inherited it and the date they sold it.
If you are looking to set up an estate plan and are curious about the associated tax issues, contact an experienced estate lawyer Phoenix, AZ offers today.
Thank you to our friends and contributors at Kamper Estrada, LLP for their insight into estate planning and taxes.