Inheritance tax requires beneficiaries to pay taxes on assets and property when ownership transfers from someone who has passed away. Currently, inheritance tax is only imposed in six states, namely Maryland, Nebraska, Kentucky, New Jersey, Pennsylvania, and Iowa. If you are inheriting assets or property from someone who lived in one of these states, your inheritance may be subject to state taxes. However, you can avoid inheritance tax with estate planning.
Who is Affected by Inheritance Tax?
If you are an heir and the deceased lived in one of the six states that impose an inheritance tax, you may be required to pay those taxes unless you are exempt. Legal spouses are exempt from inheritance taxes, meaning that if your husband or wife passes away, you do not have to pay inheritance taxes on any inherited property. In addition, in four of the six states that impose inheritance taxes (New Jersey, Kentucky, Iowa, and Maryland), children and grandchildren who receive an inheritance are not taxed. However, all other relatives will be taxed by those states.
Avoid Inheritance Tax with Estate Planning
Losing a loved one is hard enough without having to worry about paying taxes on inherited assets. However, there are ways to avoid inheritance tax.
Giving Money as a Gift
One way to avoid inheritance tax is to have your loved one gift you a portion of your inheritance money before their death. In 2023, the maximum dollar amount that can be gifted without incurring taxes is $17,000 for an individual and $34,000 for married couples.
Setting Up a Trust
Another option is to have your loved one open a trust to set aside their assets for their beneficiaries. There are two types of trusts, and the choice between them depends on how much control the grantor wants to have and how they want the transfer to be handled after their death.
- Terms can be changed throughout the trust’s life.
- Grantors still own the assets within the trust for the duration of their life.
- Assets are still associated with the grantor’s estate, which may lead to higher estate taxes and probate court.
- Assets are not associated with the grantor’s estate.
- Beneficiaries will not have to endure probate court, and estate taxes will be avoided.
- Assets are out of the grantor’s control.
- Terms cannot be changed throughout the trust’s term.
For tips on how to avoid estate taxes, you can download our PDF, “5 Tips to Lower Your Estate Taxes.”
Get Professional Advice on Estate Planning
Getting professional advice on estate planning is crucial if you want to save time and money, and avoid additional stress after the passing of a loved one. At Innovative, we not only provide our clients with peace of mind when it comes to filing their estate and trust taxes, but we also offer planning and consulting services to help ensure the best outcome for their beneficiaries.
As accountants, we can assist you with the financial and tax implications of inheritance, and we can also connect you with an attorney to help with the legal aspects of estate planning. With our expertise and guidance, you can have a comprehensive estate plan that meets your needs and protects your assets.
Don’t leave it to chance, avoid inheritance tax with estate planning. Contact us today to schedule a consultation and get started on planning for your future.