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Inheritance Tax Basics


Inheritance Tax Basics

Roxanna Guinan
by Roxanna Guinan, Contributor

It’s a fallacy that only the ultra-rich have to worry about passing down their assets. It is important for every person to understand how to leave their property and money to heirs (or other designated beneficiaries) with little or no inheritance tax consequences.  Simply put, an inheritance tax is a tax that the beneficiary must pay on the total value of their inheritance.

Inheritance tax is different from estate tax, which is a federal tax imposed on an individual’s entire estate (including cash, investments, cars, boats, real property, art, jewelry, etc.) at the time of their death. The estate tax is paid by the estate itself, and it is the responsibility of the executor/administrator (appointed by the decedent) to carry out. Inheritance tax, on the other hand, is a state tax levied by state governments, and it is the responsibility of the beneficiary to pay.

Typically, when an estate is settled, the executor determines the impact of estate taxes ― in many circumstances, they may also calculate inheritance tax so that certain assets can be liquidated to pay the combined taxes.  This can alleviate the beneficiaries’ burden of having to pay inheritance tax.

The amount of the inheritance tax depends on the type of the property inherited and the relationship of the beneficiary to the deceased person.  In general, a decedent’s immediate relatives (children, spouse, or parents) are able to claim exemptions that can reduce the amount of inheritance tax levied.  Beneficiaries who are not direct lineage relatives, however, are typically subject to higher inheritance taxes.

Many people believe that the estate tax (a.k.a. “death tax”) and inheritance tax are unethical and unfair, because they place a strain on the family who has just lost a loved one and they reduce the amount of the inheritance.  For instance, if the owner of a family business has passed away, the children may be forced to liquidate the business in order to pay inheritance tax. In addition, some states charge both an estate tax and an inheritance tax ― this “double dipping” is another source of anxiety to those favoring a repeal of the inheritance tax.

Supporters of the inheritance tax claim that it is a way to “redistribute the wealth” and ensure that richer Americans are paying their share of taxes to the government. Whatever your opinion on the matter may be, the inheritance tax is subject to the discretion of the individual states ― some states enforce an inheritance tax, and some states have actually repealed their inheritance tax.

As of July 2010, the following states imposed an inheritance tax:  Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania, and Tennessee.

As of January 1, 2010, the following states collected an estate tax: Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Ohio, Oregon, Rhode Island, Tennessee, Vermont, and Washington.