In the U.S., an individual’s estate, beyond a certain limit ($5,250,000 for 2013) is subject to federal taxes on his/her estate. Some state also impose an estate tax. Many taxpayers take the necessary measures to minimize estate taxes, but rarely prepare for an inheritance tax; often neglecting it from their estate planning. That being said, if it is a significant estate to be transferred, the individual should consider planning for inheritance tax. AG Tax has prepared a brief summary on State Inheritance Tax, which could be useful to high net-worth taxpayers.
What is U.S. Inheritance Tax?
U.S. inheritance tax is a tax on each heir’s right to receive the property transferred. It is a tax levied in certain states on the assets inherited by a person after the federal and state estates taxes have been applied to the respective estate. It is a state-only tax as the federal government does not impose an inheritance tax.
Who Needs to Pay an Inheritance Tax?
Depending on the relationship, the inheritor may need to pay taxes on the value of the inherited asset(s). The less closely an individual is related, the higher the inheritance tax rate.
Spouses, registered domestic partners, or civil union partners are exempt from inheritance tax in all states. However, charitable beneficiaries and children may be subject to lower tax rates or exempt from paying taxes depending on the state inheritance tax laws.
States that Impose an Inheritance Tax
• Iowa
• Kentucky
• Nebraska
• Pennsylvania
• Maryland and New Jersey are the two states which impose both estate tax and inheritance tax.
• Indiana has signed legislation to phase out the inheritance taxes in nine years starting January 1, 2013. No inheritance tax will be due for deaths on or after January 1, 2022.
Even if an inheritor does not reside in the above states, he/she may be subject to taxes if the benefactor resided in any of the above mentioned states.
State Inheritance Tax Return
The executor of the estate, usually the Power of Attorney or estate lawyer, needs to file a state inheritance tax return for the total estate regardless of the number of beneficiaries. All inheritance taxes have to be cleared before the estate can be closed.
Since the federal estate tax exemption limit is quite high, most estates are exempt from taxation. However the same does not apply for the state level taxes, which can have much lower exemption limits. This can make most transferred assets potentially liable to state estate and inheritance taxes.
It is advisable that individuals with significant transferrable assets (estate) should consult their estate attorneys regarding state estate and inheritance taxes taking into consideration the domicile state of the beneficiary(ies) and benefactor in order to have a proper estate plan in place.
AG Tax LLP Can Help
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts who can help you with your U.S. and Canadian Tax preparation, Cross-Border Tax consulting, and all of the necessary accounting to satisfy both Canadian and U.S. regulations.
It is critically important that people that are U.S. Citizens, U.S. Persons, U.S. Visa holders, Green Card holders, etc be aware about the different tax implications of their status and activities in the U.S., including estate and inheritance taxes. We have seen Canadian snowbirds being caught off guard not realizing that there may be estate considerations given that they are owning U.S. Property. It is strongly recommended that any individual that has concerns about their estate should consult with a qualified estate lawyer or on of AGT’s estate accountants.
Please contact Peter Aylett or Shirley Boni at 604-538-8735 to arrange for an appointment to discuss your tax related queries. Our team of tax professionals looks forward to assisting you.
IRS Circular 230 Disclaimer: Please note that this document is to be considered other written advice. Any tax advice in this document was not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law provisions.
Furthermore, the information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.