Understanding the Difference between Estate Tax and Inheritance Tax

Title: Understanding Estate and Inheritance Taxes: Key Points to Know

Subtitle: Tax obligations upon death may impact your finances and estate planning

In the world of taxes and financial planning, death can trigger certain payments known as estate tax and inheritance tax. These taxes are worth understanding in order to ensure smooth estate planning and minimal financial surprises for loved ones. Here are some essential points to consider:

1. Estate Tax and Inheritance Tax Distinction: Estate tax is imposed on the assets of the deceased before their distribution, while inheritance tax is paid by the heir.
2. Federal and State Taxes: The federal government levies an estate tax, but individual states may also impose their own estate and inheritance taxes.
3. Thresholds and Payments: Generally, estate and inheritance tax thresholds are set high enough that most people are not required to pay them.
4. Decreasing Exemptions: From 2025 onwards, the amount exempt from the estate tax is expected to decrease. This change may potentially lead to an increase in tax revenue.
5. Levying Authorities: Estate tax is mainly levied by the federal government and certain states, while inheritance tax is predominantly imposed by individual states.
6. Federal Estate Tax Rates: The federal estate tax rates vary from 18% to 40%, depending on the amount that exceeds the threshold.
7. State Estate Tax: State estate tax rates and exemption levels differ but are generally lower compared to federal rates.
8. Federal Inheritance Tax: While there is no federal inheritance tax, gains from the estate may still be subjected to personal income tax.
9. State Inheritance Tax: Presently, only six states impose an inheritance tax; however, this number is set to decrease to five next year.
10. Tax Rates and Factors: Rates for inheritance tax differ among states and are influenced by the size of the inheritance and the relationship to the deceased.
11. Maryland’s Double Taxation: Maryland stands as the sole state that imposes both an estate tax and an inheritance tax.
12. Potential Tax Avoidance Measures: Strategies to potentially avoid inheritance tax include gifting assets before death, relocating to states without inheritance tax, or establishing an irrevocable trust.
13. Covering Tax Obligations: If avoiding inheritance tax is not possible, purchasing a small life insurance policy can help cover the tax liabilities.
14. Proactive Estate Planning: Understanding these taxes and planning accordingly is crucial to avoid any unexpected financial burdens and complications in estate planning.

It is recommended to consult with financial advisors and estate planning professionals to navigate these tax obligations while ensuring the preservation of your assets for future generations. Stay informed and plan ahead to make the most of your estate.