When you are engaged in your estate planning efforts, it is natural to be concerned about estate taxation. Most people have heard the terms “estate tax” and “death tax” and in this blog post, we will provide some clarity about postmortem asset transfers and taxes.
The Federal Estate Tax
The federal estate tax is applicable in all 50 states, and sometimes people will refer to it as the death tax. This levy carries a 40 percent maximum rate so it can potentially consume a very significant chunk of your legacy.
That’s the bad news, but the good news is that most families are not impacted by this estate taxation.
This is because of the federal estate tax exclusion. The exclusion is the amount you can transfer before the estate tax becomes applicable. This exclusion is significant so your estate has to be considerable to face exposure.
In 2017, the amount of the exclusion was a robust $5.49 million. However, things got better for the wealthy in 2018 when the new tax package increased the federal estate tax exclusion to $11.18 million. An inflation adjustment upped the exclusion to $11.4 million this year.
If you are married, your family can also take advantage of estate tax exclusion portability. In an estate planning context, “portability” describes the ability of the surviving spouse to use the exclusion that was due to his or her deceased. As a result of this provision, a surviving spouse would have a total exclusion of $22.8 million this year.
The estate tax is applicable on asset transfers to any family member except your spouse. There is a spousal estate tax deduction so you can transfer unlimited assets to your spouse free of tax as long as you and your spouse are American citizens.
State Level Estate Taxes
There are a number of states that have state-level estate taxes. In some cases, the exclusions are lower than the federal exclusion so it is possible for an estate that is exempt from the federal tax to be exposed to a state level estate taxation.
Our offices are in North Carolina and Kentucky, and fortunately, there are no state-level estate taxes in these states. However, if you own valuable property in a state that does have its own estate tax, that tax would potentially be applicable.
Inheritance Taxes
Most people who are not legal or accounting professionals assume that the terms “inheritance tax” and “estate tax” are interchangeable.
In fact, these are two different forms of taxation. An estate tax is levied on the entire taxable portion of an estate before it is transferred to the heirs. On the other hand, an inheritance tax is applied on transfers to each individual nonexempt heir.
As a result, one estate can have multiple impositions of an inheritance tax.
There is no inheritance tax on the federal level, but there are a handful of states that have state-level inheritance taxes. North Carolinians are fortunate, because there is no inheritance tax to content with, but there is an inheritance tax in Kentucky. However, transfers to close relatives are exempt.
Regular Income Taxes
People often wonder if they are required to report inheritances as income for regular income tax purposes. Though it comes as a surprise to many, inheritances are not looked upon as taxable income by the Internal Revenue Service, though traditional IRAs incur taxes when money is withdrawn from the IRAs.
Capital Gains Taxes
If you inherit assets that appreciated during the life of the person that left you the inheritance, you get a step up in basis for capital gains purposes.
This means that you do not have to pay capital gains taxes on the increases in the value of the assets during the life of the decedent. However, if you hang onto them, and the assets continue to appreciate, you would be responsible for post-death appreciation from a capital gains tax perspective.
Learn More About Estate Planning!
We have covered a single issue in this brief blog post, but there is a lot more to learn if you want to plan your estate effectively.
You can definitely build on your knowledge if you attend one of the seminars that our estate planning lawyers are holding in the near future. These information sessions are free to attend, and you can reserve your seat for the seminar that you would like to attend if you visit this page: Free Estate Planning Seminars.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
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