Inheritance taxes and estate taxes are not paid by the same people.
This week likely is one of your favorites, yes?
Specifically, Tax Day for 2022 returns is tomorrow, Tuesday, April 18.
Some taxpayers will be receiving tax refunds while others will owe money to the government.
According to a recent The Alliance Times-Herald article titled “Estate, Inheritance Taxes,” many of the tax returns filed will have included estate tax returns.
When people die, their executors may be required to file tax forms on behalf of the estate.
Although there is no inheritance tax at the federal level, there is an estate tax.
What are the differences between estate and inheritance taxes?
They are often confused with one another.
Many taxpayers and politicians simply lump the two together as death taxes.
Estate taxes are paid by the estate of the decedent taxpayer.
Inheritance taxes, on the other hand, are paid by the heirs.
Spoiler alert: neither Kansas nor Missouri has either of these death taxes.
In 2023, the federal estate tax exemption is fairly high.
The current threshold is $12.92 million for individuals and $25.84 million for couples.
This means an estate will only trigger an estate tax if the value of the estate assets exceeds this amount.
While some states with an estate tax have adopted the same exemption as the federal government, others have set lower exemption amounts.
Generally, there are a number of strategies for reducing a taxable estate.
These include gifting while the individual or couple is still alive.
This is also known as giving with warm hands.
Individuals can give up to $17,000 away without triggering gift taxes or using the gift and estate tax exemption.
Couples can give $34,000 away in 2023.
Often people select family as the recipients.
Trusts can also be used to minimize the impact of estate taxes.
Most trusts will allow for the surviving spouse to have rights to the trust assets, including living in the home or receiving trust income.
When the surviving spouse dies, the beneficiaries are then able to receive distributions.
Trusts can also be used to provide for charities.
In these instances, the trust names a charitable organization as the beneficiary.
Assets used to fund the trust can include real estate, stocks, cash, or other property.
Families with extremely high net worth can also benefit from foundations owning a number of assets.
For families involved in agriculture or other family businesses, a Family Limited Partnership (FLP) can be a wise option.
Members of a family can pool assets to then be shifted or transferred to other family members.
By doing so these transferred assets are removed from the estate and result in estate tax savings.
They can be used to transfer farms between generations by allowing the older generation to manage the operation and slowly giving control to the younger generation.
Inheritance taxes work differently and can be more challenging to address in estate planning.
At this time, inheritance taxes are levied in six states.
These states are Iowa, Nebraska, Kentucky, Pennsylvania, New Jersey, and Maryland.
How are inheritances taxes calculated?
Because these are paid by heirs, they are calculated based on the amount received by each heir and on the relationships to the decedent.
Spouses are exempt from inheritance taxes but siblings, parents, children, extended family members, and non-relatives will owe taxes.
Whether you are wealthy or have moderate means, it is important to work with an experienced estate planning attorney to discuss your goals and circumstances.
If privacy is of great importance, then a trust can still be helpful to avoid the public nature of probate.
Reference: The Alliance Times-Herald (March 22, 2022) “Estate, Inheritance Taxes”