As its name suggests, the inheritance tax is a tax on property that certain beneficiaries inherit from a deceased individual’s estate or trust. Unlike the estate tax, there is no Federal inheritance tax.  The inheritance tax is levied solely by a few states on property within their borders.

Like the estate tax, the inheritance tax is slowly fading off the law books of most states across the country.  As of January 1, 2018, only six states still levy an inheritance tax: Iowa, Kentucky, Pennsylvania, Maryland, Nebraska, and New Jersey. Maryland is the only remaining state with both an estate tax and an inheritance tax.  Therefore, if the deceased was not a resident of Iowa, Kentucky, Pennsylvania, Maryland, Nebraska, or New Jersey, and did not have property within those states (such as land), then the beneficiaries are unlikely to be subject to the inheritance tax.

Unlike the estate tax, which is levied on the non-exempt portion of a deceased individual’s estate, the inheritance tax is a tax on property inherited by certain beneficiaries.  This means that the beneficiary is generally responsible for paying this tax out of the property he or she inherits.

All beneficiaries are not treated equally in regard to the inheritance tax.  A beneficiary’s inheritance tax liability often depends on that beneficiary’s degree of relationship to the deceased.  Spouses, for example, are almost always exempt from the inheritance tax, as are most charities.  However, a few of the states levy a small tax on linear descendants, such as children and grandchildren.  Some states offer a tiered structure to their inheritance tax that applies different tax rates and/or different exemption amounts to different “classes” of beneficiaries (i.e., to beneficiaries with different degrees of relationship to the deceased).

For example, under Maryland law, siblings and parents (among others) are exempt from the inheritance tax, but nieces and nephews are not.  In Pennsylvania, the inheritance tax rate changes based on the degree of relationship:  direct descendants are only subject to a 4.5% tax, while siblings are subject to a 12% tax, and other heirs are subject to a 15% tax.  Nebraska provides for different tax rates and different exemption amounts depending on the beneficiary’s relationship to the deceased.  For example, in Nebraska, immediate relatives of the deceased (such as parents, grandparents, siblings, and lineal decedents) will be subject to a 1% inheritance tax on the value of property inherited in excess of $40,000; however, a decedent’s aunt or uncle (among others) will only be entitled to an exemption of $15,000 and is subject to a 4% inheritance tax.

If you would like to ensure that your beneficiaries will be treated the same in regard to the inheritance tax, a qualified attorney can draft a trust or will that allows or requires the executor (of a will) or the trustee (of a trust) to pay or reimburse all inheritance taxes as an administration expense. With this type of planning, the inheritance tax burden would be shared amongst all the beneficiaries as an expense of the estate or trust.

How do you find out if the inheritance tax applies to you?

The above-referenced examples are merely highlights of potential inheritance tax liability that you could be subject to as a beneficiary.  The inheritance tax laws of each state are complex and varied.  Upon an individual’s death, it is vitally important to determine what tax liability you or the estate are likely to face.  We recommend that you talk to an attorney who specializes in tax or estate administration to ensure that the proper tax filings are completed and filed on time. It is important to ensure that any inheritance tax is paid timely to avoid penalties and interest.

Moreover, if you live or have property in any of the applicable states, and want to ensure that your beneficiaries are treated equally in regard to the inheritance tax, the best course of action you can take to minimize the inheritance tax burden is to ensure that you have a properly drafted estate plan drafted with the help of an experienced attorney.

The Dunlap Bennett & Ludwig team has worked with hundreds of clients to tailor individual estate plans to protect their businesses, properties, and assets and to administer estates or trusts. If you have questions about inheritance tax or are ready to map out your estate plan, contact us.

 

 

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