At the death of a person – the testator – his assets are distributed among his heirs and those he wishes to benefit from his estate. He controls the way which his assets are shared via his will. He prepares his will while he is still alive noting down every detail regarding his assets such as creditors of his estate. He also names an executor in his will. The executor is the person that will initiate the probate process and also ensure that the assets of the deceased are shared exactly the way the testator specified. His could choose an executor among his siblings; he could name his parents, or a spouse. It is advisable he chooses someone who knows how to go about the process as the success of the process of sharing his estate depends on the executor he chooses.
The most important use of the will is that it contains information of how his assets should be shared among his heirs. He can decide to include other persons as heirs such as orphanages, the less privileged, close friends, etc.
What is an Inheritance Tax?
The persons who are beneficiaries of the deceased’s estate are liable to pay tax on what was bequeathed to them. The rate of the tax which they will have to pay depends on the laws of the state they reside, the value of the inheritance and the beneficiary’s relationship with the deceased. So we can say that inheritance tax is the tax payable by an heir or a beneficiary of a deceased person’s estate on what they inherited from the estate.
Inheritance tax and exemptions
There are certain inheritance tax exemptions available for specific persons based on several factors
Relationship with the deceased: The relationship with the deceased determines whether a person will be exempted from paying an inheritance tax. The closer the relationship with the person the lesser tax you will be expected to pay. The farther away you are from the deceased, the higher the tax you will pay. A surviving spouse of a deceased person is totally exempted from paying the inheritance tax. Also, in some states, domestic partners are also exempted from paying inheritance tax while in other states descendants are exempted.
Inheritance tax threshold: depending on the state’s law, there is a certain amount of which if the tax is below it, there would be no payment of an inheritance tax. For instance in some states if the inheritance received is valued below $25,000 the inheritance passes freely to the beneficiary without the inheritance tax, in some other states the value is $50,000. The threshold value for which an inheritance tax is not applicable depends strictly on the state’s law.
Inheritance tax and estate tax
A common classification of these two taxes is known as death taxes. Under this grouping, they are seen in the same light but in the actual sense they are two entirely different forms of taxation. Some situations might require the payment of both the estate tax and the inheritance tax. Both the estate tax and the inheritance tax are levied based on the fair market value of the estate of the deceased person as of the time of death.
The estate tax is levied on the entire estate of the deceased before it is distributed among the heirs and beneficiaries of the estate. The tax is paid from the estate’s funds. An inheritance tax is levied on what a beneficiary receives from the estate and it is paid from what he or she received.
Avoiding inheritance tax
Even with the various exemptions available, the need to avoid the inheritance tax still comes up in certain situations especially when the estate of the person is pretty large.
An example of such ways is to put the desired amount you wish to leave for a person in a life insurance and make the person the beneficiary of the insurance policy.
Another way to avoid the inheritance tax is by setting up a trust and making the person of your choice the beneficiary.
The role of an attorney
In general, the help of an attorney cannot be overemphasized in matters regarding estate planning and various taxes associated with it. In other to go about the processes involved without making errors, you need the assistance of an attorney. Our attorneys are always available for consult and hire.
Question: are inheritance tax federal taxes?
Answer: in US inheritance tax are not imposed, they are strictly states affairs but federal estate taxes are compulsory.
Question: how much will I inherit that will warrant an inheritance tax?
Answer: when the value of estate you inherit is bigger that the state’s threshold value.