Estate and Inheritance Tax – What you Should Know

At PaydayLoansCashAdvance, we work with you to help you to navigate one of the most complex components of tax law, that which involves estate and inheritance tax. Managing your property and determining who will receive it after your death is a complex problem. Taxes must be paid, in most cases, on this property. By understanding both inheritance and estate tax, you may be able to better prepare your family for what’s to come. You may also be able to lower the taxes paid on your estate.

What You Need to Know

Though they are often used interchangeably, estate tax and inheritance tax are two different things. These are two different types of taxes paid on your estate at the time of your death. The difference in them is defined by the person who is, ultimately, responsible for paying the tax debt, often called the death tax.

What is Estate Tax?

The first type of tax to be concerned with is estate tax. The estate tax is determined based on the net worth of the assets you own at the time of your death. An administrator or executor is appointed by you in your will or by the courts after your death to determine where the property should go. This could be a family member, an attorney or any other adult that you elect to hold this position. It should be someone you trust to uphold your desires. The executor has the ultimate responsibility for paying off all of your debts and paying the taxes on your estate from your estate’s value. If this is not possible, then the heirs who inherited the property are responsible for paying this debt. The heirs, who are those who you decide will receive any of your assets after your death, will need to pay the taxes.

The Internal Revenue Service, or IRS, manages federal taxes on estates. This must be paid within a period of nine months following the death of the individual. The amount the IRS claims as tax depends on the value of your property. This can be as much as 35 percent in some situations. The market value of the property makes the biggest difference.

There are some restrictions and limitations to the amount you need to pay. For example, if the property passes directly to the ownership of a spouse after your death, then there is no tax paid. Additionally, there are restrictions in some cases for property that is donated to a recognized charitable organization. With an estate planner, you can plan for steps to take to reduce these risks and to reduce overall debts. For example, if an individual died in 2011, and his or her property was valued at $5 million, it may be possible to pass it to the next individual or charity without taxes. After 2011, this property value limit fell to $1. Because it varies, it is a good idea to learn this information now while you are planning your estate and to ensure that you minimize this risk to your estate.

What Is the Inheritance Tax?

The second estate and inheritance tax to be concerned with is the specific inheritance laws. When you own real estate or other properties, you get to determine who will ultimately get this property after your debt. These individuals are called heirs. Though there are some limitations on who you can pass property to depending on your marital state at the time, you have mostly free will to pass property you completely own to the proper individual.

Inheritance tax is paid by the heirs rather than by the estate. In your will, you will list the property that you wish the individual to have. The amount of tax paid is dependent on who is receiving the property. If a spouse or a child is to receive the inheritance, the amount of taxation levied on that individual may be less than what it would be if a third-party individual received it. In some situations, children may be exempt from paying taxes on property valued at $3000 or less. Otherwise, property over this amount is taxed lower than others at a rate of 7.5 percent. Non-related heirs, on the other hand, may be required to pay taxes as high as 30 percent on the property received.

If you have an insurance policy, such as a life insurance policy that pays out at the time of your death, it is not considered a type of taxable income or inheritance. Not all states actually collect these types of taxes. Those include Indiana, Iowa, Kentucky, New Jersey, Nebraska and Pennsylvania. Also keep in mind that the amount of taxes paid can change from one area to the next and from one year to the next.

If you wish to pass property from one person to the next especially if that individual is not a family member, it is best to discuss the situation with your estate planning attorney first. You’ll need to set the process up properly to reduce taxes as well as to ensure that the person you want to receive the property can do so.

Estate and inheritance tax are two of the most common taxes people don’t think about and plan for. However, if you do plan for them and use a financial planner to do so, you’ll potentially lower your tax rate. You could even place property in a trust that can minimize the amount of taxes your loved ones have to pay at the time of your death.

Estate and inheritance tax are two very important components of creating an estate plan. At PaydayLoansCashAdvance, we work with you to ensure you get the right information to handle your estate the right way – the way you want to do so. You have rights and abilities under law, but you’ll need to create a formal will that outlines those wishes. Doing so can help you to know that your loved ones will get to benefit from your years of hard work.

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