Inheritance tax- How it works

You certainly need to settle the inheritance tax after you accept or come into an inheritance from a loved one. It does not stop at being an heir to a wealthy loved one, you also need to devise ways to settle or avoid the accompanying tax.

Except this is not a serious matter in your state because some states in the United States of America do not take inheritance tax very seriously. 

However, if you reside in states like Pennsylvania, or Maryland, you need to come up with a way to pay off your inheritance tax so that it will not become a burden to you.

Now, if you come from a wealthy family, you need to understand everything there is to this tax just in case you find yourself coming into an inheritance from a family member.

What is an inheritance tax?

An inheritance tax is a kind of tax you must pay as the heir to an asset from a loved one that just passed away. 

For more clarity, this tax does not come from the Federal Government hence it is not a federal tax.

Again, What you have to pay In tax depends on how many assets you inherited. 

Additionally, this kind of tax is different from an estate tax. 

Though they both require that you spend money offsetting the bills, the sources of the funds come in different ways.

Estate tax versus the inheritance tax 

These two taxes are never the same, and though they often confuse people, here is what makes them different from each other.

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An estate tax requires the estate to pass through evaluation and assessment after its owner passes away, and the tax payment comes from its proceeds.

Meanwhile, an inheritance tax comes from the pockets of the beneficiary of the inheritance after calculating the total amount of the assets they inherited.

An estate tax is a federal tax, you can not say the same for an inheritance tax. But most times, people live in states where they have to pay taxes if they inherit an asset and an estate together. 

How inheritance tax works

Firstly, there are exemptions to paying this tax. For example, if the heir is the spouse, they do not need to pay any tax no matter where they live in the country.

With this, you can deduce that paying off an inheritance tax depends on how close you are to the deceased.

However, some states may require those close relations aside from the spouses to pay this tax.

Which states demand inheritance tax?

There are about six States in America where you have to pay this tax if you become an heir.

States like; Nebraska, Pennsylvania, Maryland, New Jersey, Iowa, and Kentucky, all demand this tax. 

Nevertheless, each state has a unique rule guiding their tax payment.

In a state like Maryland, the payable tax for an heir is about ten percent of the assets. Yet some individuals are fully exempted from paying this tax in the same state.

If the heir is either a child, spouse, sibling, or grandchild to the deceased, they do not need to worry about this tax in this state.

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Kentucky has an almost similar rule regarding close family members becoming the inheritance beneficiaries. 

Aside from the child, spouse, sibling, or parents, other family members who inherit the assets get to pay according to the size of the inheritance.

How to avoid inheritance tax

The happiness of being an heir to inheritance becomes dented by the need to pay this tax. 

Therefore, it is wise to find other ways that can make a beneficiary inherit the assets without losing money to tax.

One of these ways includes turning the assets into giftable cash and gifting it to the beneficiary. That way, no one will tax the gift for any reason. 

You may even decide to gift your beneficiary this cash periodically instead of giving it out as a lump sum.

Moreover, you can decide to put your assets in an irrevocable trust account. 

With the help of a professional, your beneficiary may not get saddled with the burden of paying taxes.

Another way to avoid paying this tax is to open up a life insurance policy and make your heir the beneficiary.  

Life insurance beneficiary payout is always lumped cash and tax-free. 

So, your heir does not have to worry about tax when they receive the benefits.

You can also write a will. This method helps to make your assets non-taxable. And it will be rightly distributed to the beneficiaries without ensuring tax on their end.

Meanwhile, you can set up a family-limited partnership and transfer the ownership to your child. 

Also, you can change the property name to your child’s name, and if you live seven years after, the tax will be removed from the property 

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Additionally, you can move to a state That does not have rules regarding inheritance tax or consider it necessary.

You can even decide to give to charity. Any inheritance left to charity does not incur this type of tax, you may consider this as an option when you think about your assets.

How much can you inherit without paying tax?

There is no definite answer to how many assets one can inherit without paying tax because if you live in any of these six states, you have to abide by their unique rules for inheritance tax. 

As you know, there is no federal tax binding on receiving inheritance so, you have to check with your state and know if there is a limit or the amount you can inherit without paying tax on it.

In states like New Jersey, family members that are not tax-exempt pay up to 16% of the inheritance worth, while Nebraska charges as high as 18% for some inheritance. 

Conclusion

To summarize, coming into inheritance has a sweet, bitter pill taste to it, especially if you inherited an enormous asset from a loved one. 

However, if you already know you are an heir apparent to some assets, you may consider having this discussion with your benefactor before receiving the benefits. 

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