What Should I Know About Estate and Inheritance Taxes?

Yee Law Group Inc. > What Should I Know About Estate and Inheritance Taxes?

While the term inheritance tax and estate tax are often used in an interchangeable manner when referring to the collected tax after someone dies, these terms have very different meaning. Therefore, let’s look at the differences between inheritance tax and estate tax.

Estate Tax

An estate tax is a type of taxation on a deceased’s property after they pass away. It’s calculated based on the property’s net worth as it was valued during the deceased person’s lifetime. In some states, the estate may qualify for a state tax exemption for both non-residents and residents who owned that property prior to their passing. For example, these exceptions range between $340,000 and $675,000 in Hawaii and Delaware. In other states, it’s possible to have as much as a $1 million exemption. Check with a tax attorney or accountant to verify how an estate tax will be calculated for the property you own or will inherit.

Inheritance Tax

This is a type of death tax that is paid by the person who inherits the property. The estate tax is based on the value of the property that they inherit. The net value is payable after tax exemptions and deductions are applied.

Transfer of Property

In states where inheritance tax is collected from the surviving spouse, they may be exempted from paying taxes on property that they inherit. Check with a tax attorney to see if this applies in your case. In several states, when property is transferred to the deceased’s surviving children they are not subject to paying inheritance tax on those properties.

Your Responsibilities as the Executor

If you were named as the executor of an estate, either because you were appointed by the court or you were named as such in the will, you have certain legal responsibilities.

  • One of the first orders of business is to determine what assets the estate has at its disposal to pay any outstanding debts of the deceased.
  • It may be necessary to liquidate some or all of the estate’s assets in order to fulfill the debt obligations. Debts may also include funeral expenses.
  • After all debts have been paid and the probate process is complete, you will have to disburse the assets to the heirs named in the will. If one or more heirs are minors, in most cases they are not eligible to receive those assets until they become of age. In the interim, you will have to set up a trust to hold those assets on their behalf. A tax attorney or estate planning attorney trusts can assist you in this. He or she can also make sure that the trust is set up in such a way as to minimize the amount of taxes that the young heirs will have to pay once they come of age.

Tax inheritance rates vary from one state to another. The tax rate is also affected by the relationship of the heir to the deceased. In nearly every situation, settling an estate and making sure the required tax obligations are met is more easily handled with the help of an experienced accountant or estate planning attorney.