CARL WATTS & ASSOCIATES

September 16, 2013

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
TOP
Perhaps the first and most important thing you need to know about an estate or inheritance is that the inheritance, estate, and gift tax codes are some of the most complex in the entire Internal Revenue Code, therefore an attorney or accountant should be consulted in situations that involve such matters.

This newsletter is intended to provide you with some basic information on the difference between estate and inheritance taxes.


As you probably know, while elsewhere in the world these terms are used interchangeably, in the United States there is a difference between estate and inheritance taxes.

The key difference between estate and inheritance taxes lies in who is responsible for paying them.


An inheritance tax is based on who receives a deceased person's property and how the beneficiary is related to the deceased person, while an estate tax is based on the value of the deceased person's estate and not on who gets what.


The estate tax is imposed by a state or federal government on the right to transfer property to your heirs after your death.


As of January 1, 2013, the District of Columbia and the following states impose a separate state estate tax: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Oregon, Rhode Island, Tennessee, Vermont, and Washington.

The inheritance tax is imposed by a state government on the privilege of certain heirs to receive a deceased person's assets.

The following six states collect an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania (Indiana's state inheritance tax was repealed effective January 1, 2013). In all six states assets left to a surviving spouse are exempt from the tax, but only four states exempt transfers to descendants.

The estate tax is assessed on the whole estate, and the amount due is paid before property is distributed to the people who inherit it. Federal estate tax affects only the largest estates, those worth more than $5.25 million for deaths in 2013. Because the tax exemption is so high, and because all property passing to a surviving spouse is exempt, it’s estimated that more than 99.7% of estates do NOT owe any federal estate tax.



Inheritance and Estate
Taxes - An Introduction
Troubles viewing this message? View in browser online here
Once the executor of the estate has divided up the assets and distributed them to the beneficiaries, the inheritance tax comes into play. The tax amount is calculated separately for each individual beneficiary, and the beneficiary must pay the tax.

Estates that aren’t large enough to pay federal estate tax may be subject to a state tax. For example, in Maryland, estates valued at more than $1 million may be taxed. Still, most estates don’t owe either state or federal estate tax. State tax rates are much lower than federal ones.

Depending on your relationship to the decedent, you may receive an exemption or reduction in the amount of inheritance tax you must pay. For example, most states exempt a spouse from the tax when they inherit the property from a husband or wife.

Children and other dependents may qualify for the same exemption, though in some cases, only a portion of the inherited property may qualify. Generally, the higher rates of tax will be paid by those who inherit property from a decedent with whom they have no familial relationship.

Of course, state laws are subject to change, so if you are receiving an inheritance, check with your state's tax agency. The tax rates on inheritances can be as low as 1% or as high as 20% of the value of property and cash you inherit. In Pennsylvania, for example, lineal descendants will pay 4.5 % inheritance tax, siblings are taxed at 12%, and anybody else at 15%.

The state would require you to report this information on an inheritance tax form.

One of the more common means of protecting inheritance from taxes is to place money into trusts and elect a trustee to transfer the property to your beneficiaries upon your death. Once money has been allocated into a trust it is removed from your listed estate and upon your death it will be distributed to your heirs free from estate and inheritance taxes.

Some people also choose to give their money in the form of gifts to organizations and establish a charitable gift annuity. Receiving money from an annuity protects your heirs from paying any inheritance tax, although they may still be responsible for an early withdrawal penalty from the IRS.

Once again, we cannot emphasize enough that if your estate qualifies for taxes, the advice of an attorney or accountant specializing in estate taxes should be consulted.