Inheritance Tax Laws

When you are planning for your retirement and considering the money that you will leave behind, you want to know that your beneficiaries are receiving the most that they possibly can. Therefore, knowing everything you can about inheritance tax and estate law can be crucial when it comes to your preparation.

If you and your beneficiaries are unfamiliar with inheritance tax then there might be trouble when you pass on. A well-informed attorney can be invaluable when it comes to handling real estate and property law, although you should try to be as well informed as possible, too.

To begin with, when an individual passes away, there are basically two types of taxes that will go into effect. These are the estate taxes and the inheritance taxes. The inheritance taxes are what your beneficiaries might have to pay when they receive any assets that you might leave them in your will. Inheritance tax is a tax on the money and other valuable assets that a person receives from the estate of the deceased. The estate is the grand total of everything the deceased owned and had interests in at their time of death. Beneficiaries have to pay taxes on the value of what they inherit, although a certain number of exemptions can be claimed in order to reduce the taxes.

An inheritance tax exemption is basically a deduction that decreases the taxable value of the inheritance itself, much like the deductions that you use on your tax returns in the spring.

Inheritance tax, sometimes referred to as the “death tax”, can vary by amount and is determined by the state. There aren’t many states that impose such a tax so the majority of people do not have to be concerned with it. In fact, the only states that impose an inheritance tax are Maryland, New Jersey, Kentucky, Ohio, Indiana, Nebraska, Washington, and Iowa. Non-lineal heirs are usually subjected to higher inheritance taxes. In other words, the closer you are in relation to the deceased, the less your taxes will be.

On the other hand, the estate taxes are imposed on your estate itself, no matter what the beneficiaries get. Some states impose an estate tax, although for the most part it is levied by the federal government. The estate tax is important to your beneficiaries because it must be paid before they are able to get any assets that you have left them. The Economic Growth and Tax Relief Reconciliation Act of 2001 has been phasing out the estate tax, and is set to repeal it but the U.S. Congress keeps debating its final fate. If you would like more information about what states pose an estate tax then visit wills.about.com

While the heirs are accountable for paying the inheritance taxes, the estate's executor or administrator, essentially the person in charge of handling the affairs of the estate, have to pay the estate tax. The executor uses money from the estate itself to pay the tax after a variety of exemptions have been applied. The general value of the estate will determine the estate tax rate. By and large, an appraiser will evaluate the fair market value of the estate's assets to calculate the estate’s value.

So what types of exemptions can be applied and what is an exemption?

An inheritance tax exemption is basically a deduction that decreases the taxable value of the inheritance itself, much like the deductions that you use on your tax returns in the spring. When an exemption on inheritance tax is claimed, the tax itself is reduced and you won’t have to pay as much. Although inheritance tax exemptions can differ from one state to the next, they are pretty much based on the same values. The estate only gets so many deductions with the estate tax, but each heir can claim exemptions with the inheritance tax.

The beneficiary’s relationship to the deceased affects the number of exemptions that the beneficiary is able to claim. The spouse is the most prominent beneficiary and anything that the deceased leaves to their spouse is tax-exempt. However, if a state considers a beneficiary a close family member of the deceased’s, they may still meet the criteria for a family exemption.

Cash and other assets, such as real estate, that are left to a charity or other type of organization are subject to other tax rates. In some states, anything that is bequeathed to charity is tax-exempt.

In the majority of the states, beneficiaries are able to deduct any insurance benefits that they get from the deceased’s estate. If the deceased paid taxes on some types of property already, the beneficiaries typically don't have to pay extra taxes on them. For more questions about estate tax, visit the IRS site on estate tax