The U.S. doesn’t have a federal inheritance tax. Most states don’t have these taxes, either. However, half a dozen states still impose these taxes, and if you live in one, it could impact the assets you inherit from a loved one following their death.
Learn more about inheritance taxes and how they could affect you if you’re a beneficiary in a loved one’s will or living trust below.
What Is an Inheritance Tax?
An inheritance tax is a tax people must pay on the money and assets they inherit from loved ones following their deaths. It’s up to beneficiaries to pay these taxes since the estates of deceased people won’t be responsible for them.
Many U.S. states have done away with these taxes, but a handful continue to tax those who inherit cash and other assets from loved ones. You’ll need to factor the taxes you owe into the equation when taking ownership of assets during a loved one’s probate process.
Which States Have Inheritance Taxes?
Certain states, such as Indiana, used to have inheritance taxes up until recently before repealing them. However, other states still have them, and it doesn’t appear they will go away soon.
The six remaining states with these taxes are:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
There is, of course, a chance these states could decide to repeal inheritance taxes at any time. But as of 2024, there are no indications they’re going in this direction yet.
Is an Inheritance Tax the Same as an Estate Tax?
People sometimes use the terms “inheritance tax” and “estate tax” interchangeably since they’re similar. However, they are technically two different types of taxes, so you should understand what sets them apart. It’ll help you steer clear of any confusion during the probate process.
An inheritance tax is a tax on the money and assets that a person inherits from a loved one. On the other hand, an estate tax is a tax on the estate that a person leaves behind at the time of their death.
While only six states have inheritance taxes, a dozen states have estate taxes:
- Connecticut
- Hawaii
- Illinois
- Kentucky
- Maine
- Maryland
- Massachusetts
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
Washington, D.C., also has an estate tax, and the IRS charges a federal estate tax on larger estates, too. A deceased person’s estate will face a federal estate tax if it’s valued at over $13,610,000.
How Much Are Inheritance Taxes?
If you live in a state where you’ll be subjected to inheritance taxes when you receive cash and other assets from a loved one’s will, you should figure out how much these taxes will cost you. Calculating this cost can become confusing since inheritance tax rates depend on many factors, including the following:
- The value of your inheritance
- Your relationship to the deceased
- The laws regarding inheritances in your state
You’ll be happy to hear that very few people end up paying inheritance taxes, even those who live in states that still have them. In many states, an inheritance must have a certain value before a tax applies. For this reason, only about 2% of people who inherit money and other assets face these taxes.
Each state with these taxes has its own threshold regarding who will and won’t pay them. They also charge different percentages when calculating these taxes. For example, Iowa’s tax rates fall between 0 and 6%, while New Jersey’s range from 0 to 16%.
Is It Possible To Avoid Inheritance Taxes?
It’s often possible for people to avoid inheritance taxes, though it will take creative estate planning when a person is still alive to prevent heirs from being subjected to this type of tax. One effective way to avoid these taxes is by having a person invest in a life insurance policy for you as part of their estate plans rather than leaving behind cash and other assets. The death benefit in this policy won’t lead to you facing taxes.
You can also avoid paying these taxes when a loved one leaves assets behind in a living trust. Bank accounts, retirement plans, and life insurance policies can all be included in a living trust and left for designated beneficiaries without subjecting them to these taxes.
Give Us a Call To Find Out About Our Probate Cash Advances
Before you can begin worrying about inheritance taxes, you’ll need to collect your actual inheritance from a loved one. This can take longer than you might expect since your loved one’s estate must go through the probate process.
Rockpoint Probate Funding can set you up with a probate cash advance if you could use cash now. It’ll help hold you over until an inheritance finally heads in your direction. Contact us at (888) 263-8588 to take advantage of our probate cash advances.
