Explanation of Inheritance and Estate Tax

I work in the legal field, and we get a lot of questions from clients regarding wills, trusts, and estate issues. Recently, estate taxes and inheritance taxes have been a major issue at our office, and a lot of our clients are confused on what they and their heirs will have to pay in the event of their death. There are a lot of misconceptions and urban legends out there about estates. One of our jobs is to give the correct information to our clients, and clear up any misunderstandings.

The first thing that we usually explain to our clients is that there actually is a difference between the two types of taxes mentioned above - inheritance taxes and estate taxes. Inheritance taxes are imposed on each beneficiary's share of the estate, while estate taxes are assessed based on the fair market value of the entire estate. The beneficiaries will be responsible for paying the taxes assessed on their inheritance. The amount they will have to pay will be calculated based on the amount of the inheritance and their relationship to the deceased.

Now, property that is passed to a surviving spouse normally is not taxed, however, property that is passed to anyone else usually is. In most states, children are allowed a deduction of $3,000 and the remainder is usually taxed at a rate between 5% and 10%. As the relationship between the decedent and the beneficiary becomes more distant, the allowed deduction goes down to $100 and the inheritance tax rate will run between 10% and 30%. Be aware that some states have no type of inheritance tax. Only ten states still collect inheritance taxes. Those states are Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee