What is the Difference Between Inheritance Tax and Estate Tax?
By Barry Zimmer on April 7th, 2016 in Inheritance Planning
Inheriting money should be a positive thing, but many people are concerned about the possibility of an inheritance tax or an estate tax. An inheritance tax and an estate tax are actually two different types of taxes, either or both of which may be trigged when someone passes away and when assets transfer. Taxes upon death can have a major adverse impact on heirs and can be detrimental to maintaining a family legacy, especially if taxes force the sale of business assets or family farmland to generate cash to pay the tax bill.
Fortunately, there are ways to reduce or eliminate the taxes which are owed upon death. In order to create a strategic tax plan, the taxes which are likely to be assessed must be understood. A Cincinnati estate planning lawyer can help you to understand the differences between an inheritance tax and an estate tax and can provide you with guidance on reducing the impact of taxation on the value of an inheritance.
Differences Between Inheritance Tax and Estate Tax
Inheritance taxes and estate taxes are different in many ways. First and foremost, inheritance taxes are paid when an heir inherits. The beneficiary of the money or property must pay the inheritance tax. An estate tax, on the other hand, is paid by the estate before assets have been distributed to beneficiaries.
Another major difference is there is no federal inheritance tax, but there is a federal estate tax. Inheritance taxes are only assessed on the state level, and these types of taxes are not charged in every state. In fact, there are only eight states that have inheritance taxes: Iowa, Indiana, Kentucky, Maryland, New Jersey, Pennsylvania, Nebraska, and Tennessee. For those who live in and inherit money in Ohio, there is no need to worry about an inheritance tax being assessed because the state does not impose this financial obligation on beneficiaries who receive a gift in the will.
Even individuals living within the states that charge inheritances taxes may not always be subject to an inheritance tax when they inherit money. The relationship with the deceased and the value of the estate can impact tax obligations. However, because heirs may have to pay, it is important to determine at what point an inheritance tax kicks in and what the amount of the inheritance tax will be.
Estate taxes, as opposed to inheritance taxes, can be assessed by the federal government on estates after a death occurs in any location in the United States. No matter where you live, where the deceased lived, or where the property was owned, taxes may be assessed which the estate would have to pay. The estate tax, however, does not go into effect until the estate has reached a certain value. This value changes each year. According to the Internal Revenue Service, an estate tax return must be filed on an estate valued at $5,450,000 as of 2016.
Some states also have their own estate taxes, but these are separate from and an addition to the federal estate tax. Ohio used to have an estate tax which had to be paid by estates after a death, but only if the estate had assets exceeding a set amount. According to the Ohio Department of Taxation, estates valued at $338,333 or less were “effectively exempt” from having to pay the estate tax. The estate tax was repealed effective January 1, 2013, however, so there is no longer a concern about heirs losing any of the property or money they inherited as a result of taxes being assessed against the state.
Protecting Yourself from an Inheritance Tax and an Estate Tax
If you and the deceased live in Ohio and you inherit money and/or property within the state, you do not have to worry about an inheritance tax and you likely will not have to worry about an estate tax unless there is a significant amount of assets in the estate.
Even when an estate does exceed the exempt limits and a return would have to be filed, there are ways to avoid having the estate tax triggered. It is very important for those with larger estates who are concerned that taxes will be taken out of their estate to make sure they take action to create a careful estate plan.
Tax avoidance must be done before the owner of the assets passes away and leaves property and assets to heirs. There are options such as transferring assets into a trust which can make it possible for estate tax to be avoided entirely. A Cincinnati estate planning lawyer at Zimmer Law Firm can provide invaluable assistance to clients in seeking to avoid taxation after death. Contact us at 513.721.1513 to learn how we can help. You can also join us for a free seminar to learn more.