Inheriting a property from a recently departed relative is always a mixed bag of emotions. On the one hand, someone who was so close to you that they had included you in their will just passed away, leaving you grieving and missing them. On the other hand, this person was evidently holding you in such high regard that they left you a portion or the entirety of their assets, a feat speaking volumes about both your relationship and the deceased’s integrity.
Sadly, as the law has no compassion or understanding, some things regarding inheritance need to be addressed regardless of your stance on it. One of them is the inheritance tax. If you’ve never been in such a situation before, you may not know the ins and outs of the process. Read on to learn what it is precisely, find out how much is inheritance tax, or whether there is a way to avoid it.
What is an inheritance tax?
Inheritance tax is the levy that a state imposes on the heir of a deceased person’s assets. It’s usually referred to as the death tax (or the death duty) and often depends on the size of the inheritance, the state where you inherit the assets (where the deceased had lived and/or owned property), as well as the relationship the deceased enjoyed with the inheritor. It’s worth noting that the inheritance tax is always covered by the person who takes possession of the assets after the death of the previous owner.
However, the tax is only applied to bequeathed property, not to property obtained by inheritance through marriage (inheritance tax isn’t applicable to bequests made through marriages). In other words, if you inherit a property from your late spouse and it’s part of your spouse’s personal estate, you don’t have to pay the inheritance tax on it.
What are the types of inheritance taxes?
Though people use it as a general term, the inheritance tax is actually one type of death tax. If you are a beneficiary, you might have to pay the inheritance tax on what you receive from the deceased according to their will; there’s also the estate tax, the amount of money taken out of the deceased’s estate upon their death.
States with estate tax are Connecticut, District of Columbia, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
States with inheritance tax are Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania.
The only state that has both types of taxes is Maryland. States not mentioned above have no inheritance taxes in place; if you inherit any assets in one of them, you might only be subject to federal taxes.
Depending on the state the deceased had owned a property in, the inheritance tax can vary between 1%-18% of the bequest.
The American government doesn’t tax inheritance in general on a federal level. It taxes large estates, though; it applies to all properties worth more than $11.7 million, but only the portion exceeding this amount is subject to the tax, not the entirety. This tax can fall anywhere between 18%-40%.
You also need to bear in mind that you might be subject to federal income tax if you earn any additional money from the deceased’s estate.
Is it possible to avoid it?
There are some exceptions to inheritance tax, which include spouses as well as children, but that’s not all; there are other ways to eliminate or at least reduce the tax. However, most of them require some forward-thinking from the deceased.
For example, the person who’s creating their will can put assets in a trust and set upon its distribution after their death. This way, these assets are no longer considered as a part of the inheritance. However, setting up a trust is a complex process, so it should be carried out carefully with legal assistance.
When it comes to money, the person can simply buy a life insurance policy in the sum they want to give someone in their will. After their death, the beneficiary in the policy will receive the money not subject to inheritance taxes.
It’s also recommended to give money and other assets gradually while you’re still alive. Gifts usually aren’t taxed, especially if they’re not significant in value.
Depending on the state you live in, the amount of money you have to fork over to pay any kind of death tax could be substantial. In most cases, you might not be able to avoid it altogether, but there are ways to lessen the financial blow.
Inheritance tax is a financial burden that can prove to be overwhelming at times. However, it doesn’t have to be as complicated as it seems; if you are not sure of your legal obligations and how much you need to pay, seek the help of an attorney or accountant.
David Tobin did his degree in psychology at the University of Edinburgh. He is interested in mental health and well-being.
The articles we publish on Psychreg are here to educate and inform. They’re not meant to take the place of expert advice. So if you’re looking for professional help, don’t delay or ignore it because of what you’ve read here. Check our full disclaimer.