Planning your inheritance is one of the most important steps you can take to set up your children for success. While planning how your assets are divided and how your legacy is continued, it’s important to remember the role inheritance taxes can have on recipients of your estate planning.
If you are planning your estate or are the recipient of a loved one’s inheritance, it is important to know the steps to take to understand the specifics of inheritance law. When it’s time to plan your next steps, Stange Law Firm can help you understand the impact inheritance taxes can have on your estate. Our St. Louis attorneys have the skills and expertise to ensure your estate isn’t overburdened by taxation.
What Is Inheritance Tax
The first step in dealing with inheritance tax is understanding what it is and how it works. An inheritance tax is a payment required if a recipient is receiving assets or properties over a certain value threshold dictated by the state. Inheritance taxes are state taxes, not federal, and are only actually enforced in six states, including Iowa, Nebraska, Kentucky, Maryland, Pennsylvania, and New Jersey. When applicable, these taxes typically range between 5% and 15% of the inheritance value.
Recipients of an inheritance might also be exempt from having to make such a payment, depending on their relationship with the benefactor. Spouses are always exempt, and other immediate family members may be exempt to certain degrees. Children, siblings, and even parents could be exempt or may have to pay a lower rate. However, Missouri does not have an inheritance tax.
The best way to see how inheritance taxes will affect you is to discuss specific tax exemption amounts and thresholds, rates, and exempt persons with your attorney. Each state has varying legislation and rules on inheritance tax, and you could be affected by more than one state’s tax codes, depending on whether you and your loved one lived in the same state. It is also important to note that there are other types of inheritance taxes that might be applicable.
What Are Other Taxes That Come With Receiving An Inheritance?
In addition to standard inheritance taxes, there are actually two other types of taxes involved in an inheritance. Both the federal government and most states require a capital gains tax. Capital gains taxes may be levied against assets that have been inherited. Any time you sell a family home, car, or other physical property or asset you inherited, you’ll pay any amount of appreciation on the asset from the time of inheritance. Federal tax works on a sliding scale that takes income and other factors into consideration. The percentages vary per state, but Missouri’s capital gain tax is 5.40%. For states with no income tax, you will not have to pay gains taxes to the state.
Estate taxes are another type of tax that might be levied after someone’s death. It tends to be the highest threshold of any of the three. Unless the recipient is inheriting a sizable sum of money or an impressively valuable asset, most Americans will not have to worry about estate taxes, as the current federal threshold on estate taxes sits at $12.06 million. If a recipient does qualify for estate taxes, however, an estate tax is by far the biggest of the three, requiring a 40% tax rate. There are also a number of states that also require an estate tax at a threshold ranging between $1 million to $7 million, though Missouri does not have an estate tax on the books.
What Are the Best Ways To Protect Your Inheritance From Being Heavily Taxed?
An inheritance is meant to ensure your loved ones are taken care of. However, when heavily taxed, it can be frustrating to see your gifts so vulnerable to taxation. Fortunately, there are a number of ways you can protect your inheritance from heavy taxation.
One of the best ways to protect inheritance is by transferring any assets you wish to bestow upon a loved one into a trust. A trust not only can help manage these assets but will easily allow for estate planning documentation that adheres to your final wishes and will. That way, upon death, ownership and possession of the trust immediately transfers to your loved one.
Because estate evaluation considers the specific market value at the date of a benefactor’s passing, it can be helpful to reevaluate this date. By selecting an alternate valuation date and holding on receiving the asset for up to six months, you can gain the additional six months to let the asset appreciate.
As a benefactor, you can also lower your tax liability by making donations and other sizable gifts. This not only can assist with avoiding taxes on gifts up to $15,000, but you can also give back to organizations and individuals who can take your donations and help the community.
Q: What Is Included in the Estate in an Estate Tax?
A: The total gross of an estate includes all assets, properties, and monetary funds the benefactor has at the date of their death. All assets that will hold value at the time of death are taxable, though if under a certain threshold for federal and state estate tax regulations, an estate tax will not apply.
Q: What Is the Best Way to Protect Assets from Being Taxed by Inheritance Tax?
A: The best way to avoid inheritance and related taxes is for the benefactor to place any assets or gifts intended for future recipients into a trust fund. This way, ownership of the fund can be transferred to the loved one receiving benefits from the will, avoiding probate and other taxation and legal delays.
Q: What Expenses Can You Deduct From an Inheritance Tax?
A: There are several expenses you can deduct when paying an inheritance tax, including any fiduciary, accountant, or attorney fees. As long as these were expenses that were used in the conservation or management of a property, it is deductible.
Q: How Does One Calculate the Inheritance Tax on a Property?
A: When calculating property inheritance taxes, executors will work to add any specific values included with assets. Bills, funeral expenses, and debts will also factor in and be subtracted from this value.
Contact Our St. Louis Estate Planning Attorneys
If you have more questions regarding inheritance tax, be sure to schedule a consultation with a St. Louis family law attorney to help you navigate setting up your assets and properties for your loved ones.