Far too many people are uninformed when it comes to the subject of estate planning, so there are a lot of mistaken assumptions and misconceptions out there. The fact is that there is a lot of money at stake, so estate planning is a matter that people should take much more seriously. With the above in mind, let’s look at the definition of an inheritance tax so that we can clear up some confusion.
Each Individual Inheritor
You may naturally assume that an inheritance tax and an estate tax are exactly the same thing. Many people think that these two terms are interchangeable, but in fact, this is not the case at all.
An inheritance tax is a death tax that can be applied on transfers to multiple inheritors when the same estate is being administered. Inheritance taxes are only a factor for a very limited percentage of Americans, because there is no federal inheritance tax.
There are a handful of states that impose state-level inheritance taxes. We practice law in the state of New York, and there is no state-level inheritance tax in our state, so you can breathe a sigh of relief on that level.
The states that have inheritance taxes are New Jersey, Maryland, Nebraska, Pennsylvania, Kentucky, and Iowa. Each state has slightly different laws, but for the most part, very close relatives are exempt from inheritance taxes on the state level.
An estate tax is a tax that differs from an inheritance tax in a number of ways. If an estate tax is going to be applicable, it will be applied to the entire taxable portion of an estate before it is transferred to the heirs. It is not levied on transfers to each individual inheritor that is not exempt.
We have a federal estate tax in the United States that everyone across the country must be aware of, but there is an exemption or exclusion that is relatively high. The exclusion is the amount that can be transferred tax-free. Only the portion of an estate that exceeds the amount of this exclusion would be subject to the federal estate tax.
Each year there are minor adjustments to account for inflation, but in 2016, the federal estate tax exclusion is $5.45 million. The top rate of taxation is 40 percent.
There is a little wiggle room for legally married couples. If both people involved are American citizens, there is no taxation on asset transfers between spouses.
In addition to the federal estate tax, there is also a federal gift. This tax was enacted decades ago to stop people from giving gifts to get around the estate tax. The exclusion is a unified exclusion that applies to the gift tax and the estate tax.
So, to explain by way of a very simple example, if you gave $5.45 million in tax-free gifts today using this exclusion, and you pass away later in the year, there would be no exclusion left to apply to your estate. The entirety of your estate would be subject to the estate tax.
We previously stated that there is no inheritance tax on the state level in New York, and that is certainly a positive. However, there is a state-level estate tax in the Empire State. We are one of just 14 states with an estate tax on the state level.
The New York state estate tax exclusion will be going up each year until it matches the amount of the federal estate tax exclusion. Until April of 2016, the New York State estate tax exclusion is $3.125 million. This means that for now, you could be exposed to a state-level estate tax even if you are exempt on the federal level.
On April 1st of each year the New York State estate tax exclusion is going to go up by $1.0625 until 2017, when the exclusion will be $5.25 million. On January 1st of 2019, the New York exclusion will be raised to match the amount of the federal estate tax exclusion.
We should point out the fact that the unlimited marital deduction that allows for unlimited tax-free asset transfers between citizen spouses applies on the state level as well as the federal level.
Attend a Free Estate Planning Seminar
If you have reached our website, you are interested in learning about estate planning and elder law topics. We do everything possible to educate people in and around Smithtown, Long Island, and we offer free seminars in addition to the information that you can find on this website.
These seminars are offered on an ongoing basis, and you can visit this page to check out schedule: Estate Planning Seminar Schedule.