As if taxes and death weren’t bad enough, the government has managed to combine the two into a single, miserable experience.
- In many cases, you don’t have just a single tax to pay. There can be multiple taxes due at various points in the inheritance process.
- Little, if anything, can be done to reduce taxes after death. However, proper estate planning before death can make a huge difference.
- A skilled estate planner can utilize trusts, properly timed gifts, insurance policies, and donations to minimize the taxes owed.
Estate Tax versus Inheritance Tax
First, estate tax and inheritance tax are not the same thing, even though you’ll find many experts that use the terms interchangeably.
An estate tax is imposed before the heirs receive any property or monies.
The executor pays the remaining debts from money or property in the estate. Any funeral or legal expenses are also paid. The federal government taxes whatever remains, if it’s a large estate. Much like income taxes, the rate varies with the value of the estate. A few states also have an estate tax.
In a nutshell, all the bills are paid using proceeds from the estate. What remains is subject to a federal tax if the amount is larger than the current exemptions, and possibly, a state tax.
The heirs then pay inheritance taxes after receiving their inheritances. This tax is a state-level tax. It’s not just the home and the funds in the bank account that are subject to inheritance tax. It’s just about everything:
- Cash, stock, bonds
- Real estate
- Business interests
- Anything else of value – The value of the estate is determined by the fair market value of all the assets.
There are a few tricks that can be used to pass more to your heirs and less to Uncle Sam:
- There is a spousal exemption. The surviving spouse is not subject to any estate taxes at the federal or state level. This exemption does not apply to children over the age of 21 or sibblings.
- There is a limit exemption. Any estate worth less than $11.4 million is exempt from estate taxes. This is for an individual. Unless you’re quite well off, estate taxes are a non-issue.
- Even if you’re over this limit, a good estate planner may be able to structure your assets in such a way that you’re below the threshold.
- Remember that this is an estate exemption. There’s only one estate, regardless of the number of heirs. The exemption can only be used once.
- At the state level, there are no hard and fast rules. Remember that many states don’t have a tax at all. Those that do offer exemptions to certain family members, but not to others. The tax rates can also vary based on the relationship to the deceased. Maryland’s laws are explained below, but for more detailed information see our article (HERE):
- Estates valued under $5 million are exempt from the estate tax
- Unless someone is a deceased’s child or direct descendent, the spouse of a child or direct descendent, a spouse, parent, grandparent, sibling, stepchild or stepparent there is a 10% on all inheritances
Most estates fall well under the exemption limit. In addition, many of those above the limit can be organized in a way to bring them under the limit. If you’ve been worrying about the government taking a bite out of your estate, you’re probably in the clear.
The average person doesn’t have to worry about federal estate taxes, and most states don’t tax the estate or the heirs. Large estates, however, are well-served by knowledgeable and aggressive estate planning. Certainly, this area requires expertise. If your family has a large estate, an estate attorney can save you a lot of money.
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Mr. Abraham is an experienced attorney and founding member of the Law Firm of Abraham & Bauer. The Towson, MD office of the firm concentrates its practice in Estate Planning, Elder Law, Probate, Medical Assistance (Medicaid), Guardianship, Asset Preservation and Fiduciary Representation.
He is an active member in a number of professional organizations that focus on law, the senior community, and estate planning. He works with clients in Central Maryland, especially in Towson, Hunt Valley, Lutherville/Timonium, Parkville, White Marsh, Bel Air & Northern Baltimore City.
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