Understanding Taxes On Inheritance And Key Considerations To Make
Inheritance taxes can take up a large chunk of an inheritance, leaving the beneficiaries with much less than the estate planner intended. Fortunately, an experienced estate planning lawyer from Roulet Law Firm, P.A., can help you learn your options for estate planning to avoid estate taxes and inheritance tax. A solid estate plan can protect the assets an individual has worked a lifetime to leave as their legacy, and ensure the estate’s beneficiaries are provided for after their loved one passes away. Contact our offices today at our Florida office at 941-909-4644 or our Minnesota office at 763-420-5087 to schedule an appointment with an experienced Minnesota or Florida estate planning lawyer.
Tax Rules for Inheritances
Inheritance tax and estate tax may seem interchangeable, but these are two different forms of tax. An estate is the entirety of a deceased’s person’s property, including bank accounts, investments, real estate, and personal property. If an estate’s value is high enough, it must pay federal estate tax (the rate varies each year) and usually a state estate tax, too. The Internal Revenue Service (IRS) defines an estate tax as a tax on someone’s right to transfer property upon their death.
An inheritance tax, on the other hand, is a tax that someone pays on assets that are transferred to them after the original owner’s death, usually either through some form of transfer-on-death policy or the probate of a Last Will and Testament. In other words, an estate pays estate taxes out of the assets of the estate, while the deceased’s beneficiaries pay inheritance taxes based on the value of the inheritance. Tax rates may also vary depending on the relationship of the heir to the deceased.
Federal vs. State Taxes on Estates and Inheritances
Although there is a federal estate tax, there is not a federal inheritance tax. However, six states assess an inheritance tax: Kentucky, Maryland, New Jersey, Iowa, Nebraska, and Pennsylvania. Each state sets its own rules regarding the percentage of an inheritance tax, who pays it, and when it is due. Typically, an heir can expect to pay the inheritance tax within several months of the deceased's death.
State of Decedent vs. State of Beneficiary
According to the Tax Policy Center, inheritance taxes may be assessed in the state where the deceased was a resident at the time of their death, rather than the state in which the person inheriting resides at the time they receive the inheritance. Even if an estate’s beneficiary lives in a state with no inheritance tax, such as Florida or Minnesota, they may have to pay an inheritance tax if their deceased relative was a resident of one of the six states that does levy inheritance tax.
Even states with inheritance taxes often offer limited exemptions. Spouses, for example, are often exempt from inheritance taxes. The exemption threshold for a decedent’s children may also be higher than that for other heirs, although, again, each state’s laws are different.
How Much Money Can You Inherit Without Having To Pay Taxes On It?
Inheritance tax rates are assessed on the portion of an inheritance left over after the state exemption. The tax rates may be in the single digits or reach as high as 18%. State tax codes can change, however, and the inheritance tax exemption amount and tax rate may vary from year to year.
An inheritance tax may be assessed not only on financial assets such as cash, life insurance policies, or banking and investment accounts, but on any assets included in the inherited estate, such as real property, jewelry, cars, or art. Sometimes a beneficiary will be required to have non-monetary assets valued to determine whether they are taxable, and at what rate.
Ways To Avoid or Reduce Inheritance Tax
The easiest way to avoid paying an inheritance tax is to inherit assets from someone who is not a resident of Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania. That being said, there are a number of strategies concerned individuals can use to reduce tax liability for their estate or its eventual beneficiaries.
Estate planners may be able to reduce the inheritance tax owed by their beneficiaries by gifting them assets during life, rather than consigning all assets to be distributed via the will as part of the probate process. Individuals pursuing this option should take care to ensure that each gift remains below the federal gift tax minimum, as defined by the IRS. If you are concerned about your heirs losing much of what they inherit to taxes, you may wish to start giving small gifts now, or combining these tactics in a way that makes sense for your financial goals.
Another option is to place assets in a trust that names loved ones as beneficiaries, protecting the assets from taxes and, depending on the terms of the trust, providing the designated beneficiaries with a steady source of income. Placing assets in an irrevocable trust effectively removes the assets from the estate. Because the assets or property are irrevocably outside the owner's control, they cannot be considered part of the estate. If the assets are no longer part of the estate, then they will not be considered an inheritance when the trust beneficiary comes into control of them. An experienced estate planning lawyer can draft a trust with a scheduled distribution of funds, or set it up so that the beneficiary can access the entirety of its contents.
Life Insurance Policies
Another common strategy for avoiding an inheritance tax is to purchase a life insurance policy in the amount you wish to leave to your loved one or loved ones and name them as the policy’s beneficiary or beneficiaries. A death benefit from a life insurance policy is not subject to inheritance taxes, as it is an insurance benefit, not a bequeathment.
Inheritance Tax in Minnesota and Florida
Florida and Minnesota residents likely will not have to worry about their heirs paying an inheritance tax since neither state assesses this type of tax. However, laws can change; states with inheritance taxes may change laws to increase or decrease their tax rates, or vote to remove them altogether. Similarly, lawmakers in Florida or Minnesota may decide to add an inheritance tax to the state tax code.
Smart estate planning can help an individual to protect everything they have earned, even if the federal and tax codes change. An estate planning attorney from Roulet Law Firm, P.A. can help you learn more about your options to create estate plans that protect your heirs from paying an estate tax.
Estate Tax in Minnesota and Florida
While Minnesota and Florida do not have an inheritance tax, Minnesota does have an estate tax. That means if the total value of the estate was over the estate tax exemption, which can and does change over time, the estate will have to pay taxes prior to distributing assets to the heirs. However, with planning, estate taxes can be minimized or even avoided entirely.
Do You Need Estate Planning Services?
Do you need help with estate planning to protect your assets and provide for your heirs? The estate planning attorneys at Roulet Law Firm, P.A. help estate planners and their families in Minnesota and Florida prepare for the future with personalized estate plans that reflect their financial situations and goals. Contact our offices in either state today by calling our Minnesota office at 763-420-5087 or our Florida office at 941-909-4644 to schedule an appointment with one of our knowledgeable estate planning lawyers.
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