Inheritance taxes and estate taxes are two distinct methods of taxation that are confused due to their common objective of collecting revenue upon the transfer of wealth. While both forms of taxation are related to the transmission of assets from one generation to the next, they differ in significant ways, including their scope, application, and the timing of tax collecting. To gain a better understanding of these differences, let’s explore each concept individually.
How do Inheritance Taxes Differ from Estate Taxes?
Estate taxes, sometimes referred to as “death taxes” or “death duties,” are levied on the total value of a deceased person’s estate at the time of their death. These taxes are typically collected at the federal level in the United States, but some states also impose their own estate taxes. Estate taxes are assessed on the gross value of the estate, meaning that they take into account the entire estate’s value before any debts or deductions are considered.
Estate taxes are typically progressive, with higher tax rates applied to larger estates. In The United States, the federal estate tax applies to estates exceeding a certain threshold, which has been adjusted over the years. The estate tax rate can be substantial, often requiring careful estate planning to minimize its impact. The tax is paid by the estate before any assets are distributed to the heirs.
In contrast, inheritance taxes are levied on the beneficiaries of an estate rather than the estate itself. These taxes are assessed based on the value of the inheritance received by each beneficiary, and the tax rates may vary depending on the relationship between the deceased and the beneficiary. Inheritance tax rates are typically lower for close relatives, such as children or spouses, and higher for more distant relatives or non-relatives.
One crucial distinction between inheritance taxes and estate taxes is that inheritance taxes are assessed at the state level in the United States. This means that the tax laws and rates can vary significantly from one state to another. Some states have no inheritance tax at all, while others have relatively high rates. Inheritance taxes are also assessed individually, so each beneficiary is responsible for paying their respective tax based on their inheritance amount.
Another significant difference between these two forms of taxation is the timing of tax collection. Estate taxes are paid from the assets of the estate before they are distributed to beneficiaries. In contrast, inheritance taxes are collected from the beneficiaries after they have received their inheritances.
Estate Planning Attorney
As you can see, both inheritance taxes and estate taxes share the common goal of generating revenue from the transfer of wealth. They differ, however, in their scope, application, and timing of tax collection. For assistance creating an estate plan that accounts for the potential for these taxes, talk to the team at Verras Law. These laws, other than the federal estate tax, vary widely between states and the location of your estate will play a pivotal role in this assessment. Contact Verras Law today.