Understanding Estate And Inheritance Taxes

They often say that nothing is certain, except death and taxes. But something else may also be certain, at least without estate planning: Paying taxes on your death, in the form of estate and inheritance taxes.

Many people use these terms interchangeably, but they in fact are quite different. The good news is that for many people, neither of these will be an issue, but for some estates, careful planning will need to be done, to minimize taxes that are paid from your estate.

Estate Taxes

An estate tax is a tax on the entire estate itself. It is paid out of the estate, before anything in the estate is ever distributed. Some states also assess their own estate taxes, on top of the federal tax, but California does not.

The good news about estate taxes is that they are only assessed at very high value estates; currently the estate limit is about $12.06 million, although that does change with some frequency, so if the value of your estate is near that number, you may want to speak to your estate attorney. One piece of good news: If you are married, you may be able to double this amount, before estate taxes penalize you. As a result, most estates won’t ever have to worry about the estate tax.

The good news is that you are allowed to subtract the value of any liabilities, from the value of your estate, which may reduce the value of your estate to an amount that is less than the taxable amount. On other words, a $1 mil home with a $900,000 lien, would only have a value of $100,000, for estate value purposes.

Inheritance Taxes

Inheritance taxes are paid by the beneficiary. It is an individual tax that is assessed on whoever inherits property from you. Careful estate planning can account for inheritance taxes, and some estates will leave extra money to beneficiaries, to pay the inheritance taxes for them.

Some property may be able to be exempted, lowering the value of what you inherit, and thus, lowering the amount that you are taxed upon. Additionally, surviving spouses that inherit, are often exempt from inheritance taxes.

The good news is that California has no inheritance tax. The bad news is that in some cases, if the beneficiary sells something left to them, they may incur an income tax penalty (beneficiaries won’t owe income taxes on any money or property that is directly inherited—that is, you won’t pay income tax on property you inherit, no matter what the value, but you would later, when you sell that property).

Different States

Note that with both estate and inheritance taxes, things get more complex if the deceased and the beneficiary live in different states, and where one state assesses a tax that the other does not. There, an estate or a beneficiary can end up paying an estate or inheritance tax.

Call the Torrance will attorneys at Samuel Ford Law today for help maximizing your estate, and lowering how much your estate may be taxed.

Sources:

floridarevenue.com/taxes/taxesfees/pages/estate_tax.aspx

nerdwallet.com/article/taxes/estate-tax#:~:text=The%20estate%20tax%20is%20a,from%2018%25%20to%2040%25