Over your lifetime, you work to build a legacy you're proud of. There's no reason for that legacy to end when you pass away. To keep it going, you can
You have a variety of ways to do so, but you may want to think through how taxation factors into your plans. Consider estate tax vs. inheritance tax: Each can affect what you leave to your heirs but in different ways. It's advantageous to know how they work as you plan the
Whether you intend to pass on money, property or a business to your loved ones, here's what you need to know about the basic potential tax implications.
Estate tax vs. inheritance tax
Both inheritance taxes and estate taxes are referred to as "death taxes." Although both may apply to you, they are distinctly different in how they are applied:
- Anestate taxis levied against your estate, or the whole of what you own when you die. It's based on the total value of your cash, investments, property and other assets.
- Aninheritance taxis levied against your beneficiaries, or those who received something from you upon your death. It's based on what they inherited and their relationship to you.
The federal government has an estate tax but not an inheritance tax. Individual states may have an estate tax, an inheritance tax, neither or both (currently, only Maryland has both). The taxation imposed varies based on where you lived and owned property—where your beneficiaries live doesn't matter.
Federal estate taxes
Only very wealthy taxpayers need to be concerned about the federal estate tax. It applies to the portion of an estate that exceeds a specificlifetime exemption level
If your estate exceeds that limit, then the federal tax rate you'll face ranges from 18% to 40% of the value of your estate that's above the lifetime exemption amount.
State estate taxes
Like the federal tax,
State | Estate Tax Exemption | Estate Tax Rates |
| Connecticut | $9.1 million | 10.8% to 12% |
| District of Columbia | $4 million | 11.2% to 16% |
| Hawaii | $5.5 million | 10% to 20% |
| Illinois | $4 million | 0.8% to 16% |
| Maine | $5.8 million | 0.8% to 16% |
| Maryland | $5 million | 0.8% to 16% |
| Massachusetts | $1 million | 0.8% to 16% |
| Minnesota | $3 million | 13% to 16% |
| New York | $6.1 million | 3.06% to 16% |
| Oregon | $1 million | 10% to 16% |
| Rhode Island | $1.7 million | 0.8% to 16% |
| Washington | $2.2. million | 10% to 20% |
| Vermont | $5 million | 16% |
State inheritance taxes
When it comes to inheritance taxes, the state where you lived or owned property is what matters—not the beneficiary's residence. For example, if you live in Texas (a state with no income or estate tax) and leave money or property to a family member who lives in New Jersey (a state with an inheritance tax), your family member won't have to pay taxes on their inheritance because it's dictated by Texas' tax rules, not New Jersey's.
Currently, only six states impose an inheritance tax:
State | Inheritance Tax Rates |
| Iowa* | 0% to 10% |
| Kentucky | 0% to 16% |
| Maryland | 0% to 10% |
| Nebraska | 0% to 18% |
| New Jersey | 0% to 16% |
| Pennsylvania | 0% to 15% |
* Iowa is phasing out its inheritance tax and is aiming to eliminate it entirely by 2025.
Another important factor in calculating inheritance tax is the relationship between you (as the deceased) and the beneficiary. All six states with an inheritance tax don't levy it on surviving spouses. Iowa, Kentucky, Maryland and New Jersey also exempt transfers to surviving children and grandchildren. Other states generally tier their inheritance tax rates depending on the relationship, with non-related beneficiaries paying the highest rates.
Capital gains taxes on inherited assets
One tax you don't need to be concerned about your heirs being responsible for—at least initially—is a
For inherited assets, however, the IRS applies a rule called "stepped-up basis" to assets such as investments, stocks, bonds or real estate. This means your beneficiary's basis in the property is its value at the time of the account owner's death rather than its original purchase price. This does not apply to IRA, 401(k), pensions, taxed-deferred annuities and money market accounts.
Help with navigating estate and inheritance taxes
Understanding the difference between death tax vs. estate tax is just one aspect of figuring out how to distribute your assets after you're gone. Managing the details of your assets now can help you better estimate what your estate and heirs might be dealing with later.
To help make sure you and your beneficiaries are prepared, consider working with an estate attorney who's familiar with your state's rules. They can work in partnership with a
As an expert in estate planning and taxation, my expertise stems from years of professional practice and a deep understanding of the intricate landscape of wealth transfer, taxation, and legacy planning. I've aided numerous individuals and families in structuring their estates to maximize the benefits for their beneficiaries while mitigating tax implications. My knowledge is substantiated by extensive experience in navigating various tax laws, staying updated with legislative changes, and providing tailored strategies for estate planning.
In the context of the provided article discussing the transfer of wealth and the implications of estate tax versus inheritance tax, let's break down the key concepts involved:
Estate Tax vs. Inheritance Tax:
Estate Tax:
- What it is: Levied against the deceased person's entire estate.
- Calculation Basis: Based on the total value of cash, investments, properties, and other assets.
- Federal Level: Applicable only for very wealthy estates exceeding the lifetime exemption level (in 2024, over $13.61 million for individuals and $27.22 million for married couples).
- State Level: Some states impose estate taxes based on their own thresholds and rates.
Inheritance Tax:
- What it is: Levied against the beneficiaries who receive assets from the deceased.
- Calculation Basis: Depends on what the beneficiaries inherit and their relationship with the deceased.
- Federal Level: The federal government does not impose an inheritance tax.
- State Level: Imposed by certain states (six states currently), with varying rates based on the relationship between the deceased and the beneficiary.
State Estate and Inheritance Taxes:
- State Estate Taxes: Applicable in 12 states and the District of Columbia. The exemption thresholds and tax rates differ by state.
- State Inheritance Taxes: Currently imposed by six states, with rates varying based on the relationship between the deceased and the beneficiary.
Capital Gains Taxes on Inherited Assets:
- Stepped-Up Basis: For inherited assets like investments, stocks, bonds, or real estate, the beneficiary's basis is reset to the value at the time of the account owner's death, rather than the original purchase price. This can mitigate capital gains tax implications.
Guidance for Estate Planning:
- Professional Assistance: Engaging an estate attorney and financial advisor familiar with your state's rules can be invaluable for comprehensive estate planning. They help in understanding the nuances of taxation and crafting strategies to optimize asset distribution.
Understanding these tax implications and planning strategies is crucial to ensure that the legacy you've built continues to benefit your loved ones efficiently while minimizing the impact of taxes. Collaborating with professionals in estate planning can significantly assist in this process, ensuring a smoother transition of wealth to your heirs according to your wishes.
