One of the benefits of estate planning with an experienced wills and trusts lawyer is that it reduces the amount of taxes your estate will be subjected to after you pass and, therefore, the amount of taxes your heirs will pay on the assets they receive.
When it comes to bequeathing money and property, some of the most common questions people have relate to the various types of estate planning documents they need to take care of their loved ones. Taxes are a major concern for many people, but the right estate plan can minimize the burden.
Are inherited property, assets, or money taxable?
For federal tax purposes, inherited assets are not considered income. However, inheritance laws vary from state to state, so depending on where you live, you may have to pay state taxes on your inheritance.
California doesn’t have estate or inheritance taxes, but if you’re a California resident and your beneficiaries are legal residents of another state, they may have to pay taxes where they live.
Only six states impose an inheritance tax:
- New Jersey
Washington, D.C., also assesses an inheritance tax for residents.
If you use your inheritance to earn income, such as profits from investing in the stock market investments or selling property you’ve inherited, you’ll have to pay taxes on any money you make.
Inheritance Tax vs. Estate Tax
The main difference between an estate tax and an inheritance tax is who pays.
Estate taxes are assessed against the estate, no matter who its beneficiaries or heirs happen to be. The estate’s administrator (usually the executor of the will) files a single estate federal tax return on behalf of the estate. The tax owed is paid out of the estate before it’s allocated to the heirs. It’s calculated on the estate’s total value before debts are settled and assets are distributed.
As such, an estate tax might hurt your heirs indirectly due to the reduced share of the estate they receive rather than directly in the form of taxes on what they’re bequeathed. If you want to reduce the amount the estate pays in taxes, there are other ways to transfer assets to your heirs that could avoid the tax burden.
12 states assess an estate tax, which the deceased’s estate pays:
- New York
- Rhode Island
Residents of these states are taxed according to the laws in the states where they live.
It’s important to note that inheritance taxes aren’t determined based on where the inheritance comes from — in other words, the locality where the deceased was a legal resident when they died. Instead, the taxes are levied according to where the money goes, or the places where the beneficiaries are legal residents.
The Importance of Proper Estate Planning
The matter of which states assess which kinds of taxes — inheritance, estate, or both — should be an important consideration for you and your estate planning attorney. A qualified wills and trusts lawyer in Orange County can help you create the right estate plan to reduce the taxes levied on the estate and any taxes your heirs may have to pay.
Estate planning isn’t just avoiding taxes. A good estate plan can ensure that your loved ones are financially secure and important heirlooms remain in the family. It can also ensure that you’re provided for in your old age or if you become incapacitated.
We can help. OC Wills & Trust Attorneys is an estate planning law firm in Orange County, California. Contact us today to learn more about your estate planning options.