When a beloved family member dies, the last thing you want to think about is inheritance taxes. Unfortunately, though, inheritance taxes are a grim reality, and one that you cannot avoid when you're dealing with estate matters. Before you dispose of any property or assets, you should calculate your estate and inheritance taxes and make sure you have enough inheritance money to pay them.
What are inheritance taxes?
ome people confuse estate taxes and inheritance taxes, but estate taxes and inheritance taxes are actually very different. Estate taxes are levied by the federal government and are paid directly by the estate. The federal government does not charge any inheritance taxes.
Inheritance taxes are levied by individual states and are paid directly by the beneficiary, not the estate. This means that, if you live in a state that charges inheritance taxes, and you receive inheritance money from a deceased family member, you'll have to pay a portion of that money directly to the state.
If I'm getting just property, do I still have to pay taxes?
Inheritance tax law varies from state to state, but it traditionally applies to any assets you receive as part of an inheritance. Therefore, if you receive property, such as a home, instead of actual inheritance money, you'll still owe inheritance taxes on that property. In some cases, recipients of a property by inheritance cannot afford to pay the inheritance taxes, and they must sell the property to pay the inheritance taxes.
Is there any way to keep from owing inheritance taxes?
The best inheritance advice to prevent you from owing inheritance taxes is to be very specific about the structuring of the will. People can state in the will that they would like the estate to pay inheritance taxes, instead of forcing the beneficiary to pay them. In this type of arrangement, a portion of the inheritance money is earmarked to pay inheritance taxes, instead of distributed through the estate. However, this must be structured clearly, so people who want the estate to pay inheritance taxes should consult an inheritance tax professional to ensure the will is worded correctly.
Are there any exemptions?
While inheritance taxes vary by state, most states offer exemptions that effectively reduce the inheritance tax burden. A surviving spouse may be exempt from any and all inheritance taxes and receive an estate completely tax free.
Family members may also qualify for exemptions to inheritance taxes, typically in the form of a lump sum, depending on the state. In many cases, family exemptions to inheritance taxes are classified depending on the relationship between the beneficiary and the decedent. Further, the laws governing inheritance taxes for charities are different than individuals, so you may be able to leave money to a charity at a lower rate or completely tax-free.
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