 Personal Finance PowerPoint Presentation Inheritance Tax Prepare to get financially fit by practicing personal finance Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course Each course then organized in a logical, reasonable fashion Making it much more easy to find what you need than can be done on a YouTube page We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable So once again click the link below for a free month membership to our website and all the content on it Most of this information comes from Investopedia Inheritance Tax which you can find online Take a look at the references Resources continue your research from there This by Janet Barry Johnson Updated May 31st, 2022 In prior presentations we've been looking at estate planning then focusing in on particular tools that can be used in estate planning Now we're focused on an inheritance tax First question What is inheritance tax? An inheritance tax is a tax imposed by some states on the recipients of inherited assets So let's do a quick recap of the timeline for our estate planning Before we die What we want to do is make it as easy as possible at the point of death to be able to allocate our assets in accordance with our wishes We want to make the process as easy as possible on our loved ones and we would like to generally pay as little taxes as possible which really is just simply reverting back to the first point of wanting to be able to allocate our assets in accordance with our wishes When we think about taxes at the point of death we usually think on the federal side possibly having the death tax or the estate tax So a quick recap on the tax situation Note that the main tax that we think about in the United States is the income tax, usually the federal income tax we tax when we earn money and on the state side of things we also might have some states states can do whatever they want theoretically they can tax how they choose they might mirror the income tax on the federal side or some states might tax some other way such as through a sales tax or property tax or something like that, some other combination And then at the point of death we have on the federal side an estate tax which is a little funny because that tax is kind of like the balance sheet side of things so we have to accumulate all of our assets into an estate and determine if that amount is large enough to be subject to an estate tax and then apply the estate tax on the estate as opposed to what you might think would be like another reasonable way you could try to format this if you're going to tax at the point of death wait till the money goes to the recipients as income and then they would tax it when they receive it that would be an inheritance tax so you would think you wouldn't really have both on the federal side you've got the estate tax you tax these estate and some states then again can do what they want at the point of death they might have nothing in terms of death tax of any kind or inheritance tax if they so choose they might tax in other ways or they might have a state tax that kind of mirrors in some similar ways like the federal government estate tax or they might choose an inheritance tax which makes more sense and that it lines up kind of with the income tax in some ways because then the money would flow through you would think from the estate to the recipients and you would say well it's kind of like they're getting income so we should tax the person who's receiving kind of like the income side of things so those are the options we're generally looking at the state side of things from the United States taxes when we're thinking of an inheritance tax remembering that the Fed has an estate tax okay in contrast to an estate tax an inheritance tax is paid by the recipient of a bequeased rather than the estate of the deceased so again you wouldn't really think it would be taxed twice right someone dies either you pile up all their gold on top of the dead corpse tax the net value of it at that point in time or you wait till the distribution of it goes to the individuals and then try to tax it when the recipients receive it so the tax is not common in the US and whether or not it applies in one of six states with an inheritance tax as of 2022 depends on the state in which the deceased lived or owned property the value of the inheritance and the beneficiaries relationship to the decedent so understanding inheritance taxes an inheritance tax is not the same as an estate tax so don't get them mixed up the estate tax is generally the one that you might be subject to on at least the federal side of things if the estate is large enough we're talking about the more unusual tax which would be applicable possibly depending on where you are on the state side of things an estate tax is assessed on the estate itself before its assets are distributed basically like a balance sheet kind of thing well an inheritance tax may be imposed on the bequeasts beneficiaries so it's kind of more like an income kind of thing because it's kind of like you're saying that the inheritance is basically income so there is no federal inheritance tax in the US while the US government taxes large estates directly imposing estate taxes and if relevant income tax on any earnings from the estates it does not impose an inheritance tax on those who receive assets from an estate again you would think that you wouldn't do both because that seems kind of like double taxation if you tax the balance sheet and then the recipients after they get it so you would think it would be one or the other so inheritance taxes are collected by six US states you got Iowa, Kentucky, Maryland, Nebraska Jersey and Pennsylvania whether your inheritance will be taxed and at what rate depends on its value your relationship to the person who passed away and the prevailing rules where you live inheritance tax may be assessed by the state or states where the decedent lived or owned property how inheritance taxes are calculated an inheritance tax if due is applied only to the portion of an inheritance that exceeds an exemption amount so we got this kind of similar kind of concept of an exemption that we saw on the estate having an exemption and we saw we can kind of compare it to the income tax side of things comparing it to the federal income tax where you have like a standard deduction like you got to clear the standard deduction and then you might be taxed over and above that amount is the general concept above those thresholds that are typically assessed on a sliding basis so you might have some type of progressive tax rates again kind of similar to what we have seen on the income tax side of things with different rates sliding basis so rates typically begin in the single digits and rise to between 15% and 18% both the exemption and both the exemption you receive and the rate you're charged may vary with your relationship to the deceased more so than with value of assets you are inheriting as they rule the closer your familiar relationship to the deceased the higher the exemption and the lower the rate you'll pay surviving spouses are exempt from inheritance tax in all six states so it kind of makes sense to some degree depends how you kind of look at it obviously if you're looking at a surviving spouse a married couple you would think that in general they were two entities now they're one kind of financial or legal entity so you would think there wouldn't be a tax when one spouse dies and the money goes to the other person or you can just think of them as one legal entity although again the technical definition could change from state to state whether it be community property states and so on but like one legal entity that hasn't really terminated until the second person dies so but when it goes to someone else then again you would think that a closer family member then in some ways you might say well that seems like a normal kind of distribution maybe not subject to taxes and if it was a complete random person that you wouldn't think would be in the normal line of inheritance due to family maybe then that's the justification to say well they're going to have a higher tax rate or something like that it's a little bit I don't live in one of those states so that's a little bit unusual to me but it makes some sense domestic partners too are exempt in New Jersey decedents are only subject to an inheritance tax in Nebraska and Pennsylvania inheritance tax thresholds in most states an inheritance tax applies to be queased above a certain amount in a few instances the size of the estate is significant there are further exemptions for heirs depending on how closely related they are they were to the deceased or the details by state Iowa immediate family members you got spouses, parents, children are exempt charities exempt up to $500 the tax rate on others ranges from 5% to 15% of inheritance Kentucky immediate family members spouses, parents, children siblings are exempt other recipients exempt up to $500 or $1,000 the tax is on a sliding scale based on the size of the inheritance and includes a minimum amount plus a percentage ranging from 4% to 16% Maryland immediate family parents, grandparents, spouses children, grandchildren, siblings and charities exempt other recipients exempt up to $1,000 the tax rate is 10% Nebraska spouses and charities fully exempt immediate family, parents, grandparents siblings, children, grandchildren exempt up to $40,000 other relatives are exempt up to $15,000 and unrelated heirs up to $10,000 the tax rates above those exemptions are 1% 13% and 18% respectively New Jersey immediate family, spouse children, parents, grandparents grandchildren and charitable organizations exempt siblings and sons, daughters and law exempt up to $25,000 the tax rate ranges from 11% to 16% depending on the size of inheritance and the familial relationship Pennsylvania, spouse and minor children exempt, adult children, grandparents and parents are exempt up to $3,500 the tax rate is 4.5%, 12% or 15% depending on the relationship inheritance tax versus estate tax inheritance tax and estate tax are often lumped together however they are two distinct forms of taxation both levies are based on the fair market value of a deceased person's property usually as of the date of death so clearly when someone dies then you're going to have to manage the assets and liabilities so you're going to have to value assets and liabilities to do that you're basically doing a balance sheet kind of calculation as of a point in time and so if you have stocks and bonds that's fairly easy to do it's a little bit more difficult to do with like real estate and jewelry and stuff like that because it's unique in nature but you gotta have a value of it generally so but an estate tax is levied on the value of the deceased's estate and the state pays it so on the estate tax side of things again you're kind of thinking of it as like it's still part of the property of the deceased person right it's the deceased person's estate which you are now taxing which in that kind of seems like a double tax because you've taxed them when they earn the money and now you're taxing when they're dying on the balance sheet side of things but it could be a little bit easier you know it has its pros and cons in contrast if you're going to do any kind of tax when someone dies but in any case in contrast an inheritance tax is levied on the value of an inheritance received by the beneficiary and it is the beneficiary who pays it so on an inheritance tax now you got the lump of the estate you're talking I mean if it's a wealthy individual that was subject to the estate tax then if it was an inheritance tax you're going to wait until they actually distribute it to the other individuals which from an income tax side of things kind of makes sense because now you're saying well it's kind of like income to the under other individuals although people that don't really like taxing people when they die is would say well it's more like a gift right it seems more like a gift at that point in time an inheritance and that's why the gift and the inheritance are tied or kind of tied together you can see how you would both of these two things if you applied either strategy would result if the tax was significant and different planning strategies and trying to lower the overall amount of the tax that would be implied as the tax gets more and more significant right so the distinction between an estate tax and an inheritance tax with identical rates and exemptions might make no difference to a sole error but in some rare situations an inheritance could be subject to both estate and inheritance tax according to the internal revenue service IRS federal tax returns are only required for states with values exceeding 11.7 million in 2021 and 12.06 million in 2022 so we talked about the federal estate tax in prior presentations it was originally designed to only tax really really wealthy people it wasn't one of these things that was going to creep down to the middle class or anything and they raised the rates so it's fairly significant but again that's not like billionaire status at that point so and again they could change the law basically at any time so we talked about that in the past if the estate passes to the spouse of the deceased person no estate tax is assessed if a person inherits an estate large enough to trigger the federal estate tax the decedent lived our own property in a state with an inheritance tax and the bequest is not fully exempt under the state's law the beneficiary faces the federal estate tax as well as a state inheritance tax so if you have a state tax then again you want to obviously take that into consideration with your planning process the estate is taxed before it is distributed and the inheritance is then taxed at the state level errors may also face a state estate tax as of 2022 12 states and one district still collect a state taxes Connecticut a district of Columbia Hawaii, Illinois, Maine, Massachusetts Maryland, New York, Oregon Minnesota, Rhode Island, Vermont and Washington so all these states that are taxing you when you die in addition to the Fed if you're a wealthy individual you might want to get out of them I don't know any case that's just thought so if you live in a state with an estate tax you're more likely to feel it's pinch then you are to pay federal estate tax the exemptions for state and district estate taxes are all less than half those of the federal assessment in other words if you're subject to an estate tax on the state side of things it might not be as high in terms of the rates that they're going to apply or whatnot but usually the exemption threshold is much lower than the federal thresholds that we have up here so some states some state a state tax exemptions may be as low as one million dollars so again a million dollars and the other kind of problem with this kind of tax when it's on the federal side of things is that you know if they had a federal tax a state tax exemption that was a million dollars a million dollars is a lot less depending on where you live like if you live in a high cost of living area like New York or California you know a home that's an average home could be you know getting close to a million dollars at this point in time whereas if you live other parts of the country the cost of living is going to be a lot less so it's kind of hard to try to have a blanket you know a state or death tax that's kind of the same for the whole country kind of thing on the state level again what you know would kind of depend where you are in terms of people's state being valued possibly at different ratings in any case avoiding inheritance tax that's what we want to avoid the taxes no matter where we're at so while there are a lot of exceptions and exemptions for inheritance taxes especially for spouses and children residents with significant assets in a state with one may still want to minimize the exposure for errors so one common strategy is to buy a life insurance policy in the sum you wish to bequeath and make the person you want to leave it to the beneficiary of the policy so if you're going to leave the money to someone who might be subject to inheritance tax you might try to plan some kind of way that you could give that portion of the money possibly by a life insurance policy which may not be subject to the inheritance tax the death benefit from an insurance policy is not subject to inheritance tax so you could also put assets in a trust preferably in a irrevocable trust this effectively removes them from your estate and their classification as an inheritance upon your death so we can use the same kind of tools we've talked about in the past a trust being kind of similar to a corporation and then it's a separate legal entity so now you're putting money into the trust and you're trying to say well look I don't have the money at the point of death it's in the trust and the trust has been set up to do whatever the trust does when I die and again you've got this kind of problem when you do that as to whether the trust is going to be revocable or irrevocable and so on because you would think the state might say well if it's revocable you still have control over it and therefore it might not do what you want to do and we're still going to apply the tax and so on so you got to make sure that if you're setting up a trust you're doing so so that it achieves the purpose or goal that you're looking to achieve so you can set up a schedule for the distribution of the funds when you establish the trust consider giving money gradually while you're alive to recipients this is the same kind of strategy that we could do to avoid any kind of death tax whether it be inherited tax or whether it be the estate tax we try to give the money away before we die remembering that on the federal level they have some limits because the government is going to try to limit how much giving away you can do and so on so they can try to get a piece of estate so you got to make sure you're in compliance there so instead of a lump sum bequest upon your death so states usually don't tax gifts so the states that are taxing on the inheritance may not be as as into this or be as restrictive in terms of tying together the gifts as the federal taxes remember on the federal side of things if you're subject to a federal estate tax because you're fairly well off then you got to be careful on how much you're gifting and so on and so forth so how much can you inherit without paying taxes so the six US states with inheritance taxes provide varying exemptions based on the size of the inheritance and the familial relationship of the heir to the deceased the federal estate tax exemption shields 12.06 million dollars from tax as of 2022 there's no income tax on inheritances so on the federal side of things what is the federal inheritance tax rate so there is no federal inheritance tax that is because it's an estate tax on the federal side that is a tax on the sum of assets an individual receives from a deceased person so remember on the federal side they pile up all the all the gold on top of the dead corpse and then the government comes takes its portion first before you divvied up before everyone else and therefore it already got taxed on the estate side of things not on the inherited side of things for the recipients of the money so however a federal estate tax applies to estates larger than 11.7 million for 2021 and 12.06 million for 2022 the tax is assessed only on the portion of an estate that exceeds those amounts the rate is on a sliding scale from 18% to 40% do beneficiaries have to pay taxes on inheritance it depends on their familial relationship to the deceased and on the state where the decedent lived or owned property only estates are property located in one of six states that impose inheritance taxes may be subject to them surviving spouses are always exempt from inheritance taxes other immediate relatives like the deceased parents children and siblings are exempt to varying degrees depending on the state they may be entitled to inherit a certain sum tax free and to pay a lower tax rate on the remainder inheritance taxes mainly affect more distant relatives and unrelated errors how is inherited how is inherited tax calculated inheritance tax rules vary by state most states divide beneficiaries into different classes depending on their family relationship to the deceased immediate lineal unrelated and set exemptions and tax rates based on those categories most states only apply tax to an inheritance above a certain amount they then charge a percentage of this sum it may be flat or it may be graduated Kentucky for example imposes a rate that ranges from 4% to 6% rising as the inheritance amount does from 1% to over to from $1,000 to over $200,000 it also imposes a flat dollar figure ranging from $30 to $28,670 based on the sum inherited what's the bottom line inheritance taxes only affect residents in 6 states and they mainly apply to distant relatives or those completely unrelated to the deceased spouses are always exempted and immediate family members, children, parents often are as well siblings, grandchildren and grandparents if they're taxed at all receive more generous terms larger exemptions lower rates still inheritance taxes can kick in at relatively small inheritance amounts sometimes as little as $500 those considering bequeasts that could be subject to an inheritance tax might consider a state planning strategies including gifts, insurance policies and irrevocable trusts