If your loved one dies in 2024 with an estate valued at over $13.61 million, a portion will be subjected to the federal estate tax. This tax applies to any estates exceeding this monetary threshold, so don’t be surprised if the IRS comes knocking at your door if your loved one leaves an unusually large estate behind.
Some states also have their own estate taxes in place. While almost 80% of states don’t have these taxes, a handful do, and your family will need to be aware of this before you begin distributing a loved one’s assets according to their will. Discover more about estate taxes and how they work below.
What Is an Estate Tax?
An estate tax is a tax that a person’s surviving family must pay in certain circumstances based on the value of the estate they left behind. If your loved one dies while living in a state with these taxes and their estate is valued at a high enough number, your family might be left to pay taxes before asset distribution can begin.
It’s a good idea to know whether or not you live in a state with estate taxes before you’re forced to find out about it at the last minute. It can prevent potential complications from popping up and causing your loved one’s probate process to drag out unnecessarily.
Which States Have Estate Taxes?
Twelve states still impose estate taxes on residents. Some have much lower thresholds than the federal estate tax regarding which estates will be subjected to this tax. A select few states have thresholds of just $1 million.
Here are the states that subject the estates of deceased residents to these taxes:
- Connecticut
- Hawaii
- Illinois
- Maine
- Massachusetts
- Maryland
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
Washington, D.C., also has an estate tax.
Each state has its own tax threshold and tax rate. It’s worth mentioning that Maryland is currently the only state subjecting residents to estate and inheritance taxes.
Are Estate and Inheritance Taxes the Same Thing?
Some people make the mistake of lumping estate taxes and inheritance taxes into the same category. While they’re both considered “death taxes” by many Americans, you can’t use these two terms interchangeably. Knowing their differences can help you navigate the probate process more confidently.
The biggest difference between these two types of taxes is that a person’s estate is responsible for covering estate taxes, while those who inherit cash and other assets from loved ones are in charge of paying inheritance taxes. These people reserve the right to turn down the chance to inherit assets in exchange for not having to foot the bill for inheritance taxes.
Another key difference between these two types of taxes is that while the federal government has an estate tax, it doesn’t have an inheritance tax. The only people who will have to deal with inheritance taxes are those who live in Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Can I Avoid Estate Taxes?
Unlike with inheritance taxes, avoiding estate taxes altogether is tricky. You can turn down an inheritance to steer clear of paying inheritance taxes to your state, but it won’t be quite as easy to avoid estate taxes.
That being said, some specific people can avoid paying these taxes. For instance, any portion of a deceased person’s estate left to their spouse won’t be taxed. Spouses can take advantage of the unlimited marital deduction that allows them to leave assets to their surviving spouses without facing taxation.
You can also avoid paying these taxes if your loved one takes a more creative approach to estate planning than normal. Some very wealthy people utilize mechanisms like living trusts to automatically transfer ownership of assets to beneficiaries at the time of their deaths without subjecting them to estate taxes. As convenient as this sounds, it must be arranged in advance of the person’s death.
Setting up an irrevocable trust, such as an intentionally defective grantor trust, is another way your loved one can help you escape estate taxes. Just make sure you work closely with a tax professional to create a trust correctly so that it isn’t subjected to taxes later.
Touch Base With Rockpoint Probate Funding To Learn How Probate Cash Advances Can Help You
Many states that once had estate taxes no longer subject residents to them. New Jersey, for example, stopped taxing estates in 2018. However, some states still force residents to face these taxes, making going through the probate process even more difficult for them than usual.
If you’re struggling to work through a loved one’s complex probate process, Rockpoint Probate Funding can help by supplying you with a probate cash advance as long as you qualify. Reach out to us at (888) 263-8588 today to speak with an experienced representative about possibly securing one.
