6 types of taxes your estate faces during probate
6 types of taxes your estate faces

6 types of taxes your estate faces during probate

When someone dies in the United States, there are several types of taxes that may be charged on their estate.

Taxes can take up a sizable chunk of your estate. They all have to be cleared first before your beneficiaries can inherit. In the end, your family may not get all you wanted them to receive.

There are 6 different types of taxes your estate may face during probate. But fortunately, not all of them may apply to your estate.

So let us take a brief look into these 6 types of taxes.

1. Federal estate tax

The federal estate tax is an amount charged on your estate when you pass away, if only the estate surpasses the estate tax threshold (exemption amount) at your death. This threshold increases from year to year. It was $11.18 million in 2018, $11.4 million in 2020, and $11.58 million in 2020. Currently in 2021, the threshold is $11.7 million. So for deaths in 2021, a percentage of the decedent’s estate must be paid to the federal government so long the estate values above $11.7 million. The percentage paid varies from 18% to 40% of the estate

When you die, your executor has nine months to file the federal estate tax return form.

The federal estate tax is valid across of states in the US.

2. State estate tax

This tax is not valid for all states. In fact, only 12 states and the District of Columbia charge an estate tax.

These states include:

  • Connecticut
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Vermont
  • Washington
  • And the District of Columbia.

If you live in any of these territories, your estate will be taxed when you die if only it exceeds your state’s estate tax exemption amount. The exemption amount varies from state to state. In New York, it has currently been increased to $5,930,000 for deaths in 2021. So if a person dies in 2021 leaving an estate worth over $5.93 million in New York, their executor would have to file a state estate tax return before the deadline.

Note that state estate tax exemption amount rises yearly due to inflation just as the federal estate tax. However, its rates are lower.

3. State inheritance tax

Inheritance tax is an amount of money charged for the transfer of a deceased person’s assets. That is, if Joe is receiving $10,000 from the estate, he has to pay an inheritance tax on that amount received. Anne also has to pay from the amount she receives, and so on. It is an individual tax.

Even when your estate will not be subject to federal or state estate tax, your beneficiaries may have to pay inheritance tax during the probate process before they can inherit your estate. But fortunately, only a few states impose inheritance tax on asset transfer.

Currently in 2021, only six states in the US charge inheritance tax.

These states include:

  • Iowa (up to 15%)
  • Kentucky (up to 16%)
  • Maryland (up to 10% of the asset transferred)
  • Nebraska (up to 18%)
  • New Jersey (up to 16%)
  • Pennsylvania (up to 15%)

4. Personal Income tax

The income tax return is required if you earned a minimum amount of income in the year you died.

Your executor would have to file your final state and federal income tax returns for that specific calendar year, since you could not have done so before passing away. The return is typically due by April 15 of the year after the death. If for instance death occurred in August 2010, then the income tax return form must be filed by April 15, 2011.

If you pass away early into the year before April 15th, then you’ll most likely not have filed your income tax return for the previous year. Hence, your executor would have to file both together.

5. Estate income tax

Interestingly, your estate may still be earning income during probate. Certain investments or your business would still be generating revenue for your estate, so a tax return form would also be filed for this.

Your executor may need to notify the state taxing authority that probate has commenced.  If probate begins in July, then the calendar year can be set from July to July to avoid filing two returns should probate drag into the next year.

6. Trust Income Tax

Trusts are relatively complicated. While trusts typically minimizes tax, they may also attract tax, but only if the trust assets are receiving income. The minimum amount of income is set by the state. If the income earned is below this value, then there will be no issue of trust income tax.

Want to avoid estate tax? Talk to an estate planning attorney near you.