The death of a loved one overwhelms those left behind. If you stand to inherit the deceased’s assets, you must understand what you will inherit and how taxes will impact that bequest.
When planning your estate, it is important to consider how much your loved ones will owe the government. States levy two types of taxes upon estates left to family or friends, inheritance tax and estate tax.
Who pays these taxes?
The beneficiary pays the inheritance tax upon receipt of the assets while the deceased’s estate pays the estate tax. The executor for the estate files one estate tax return and funds the tax bill with estate funds. The value of the deceased’s estate dictates the amount due which is then paid directly to the state.
Depending upon where you live and where the departed lived, one tax, both or neither could apply.
How do you know if you owe inheritance taxes?
Even if you live in a state like Wisconsin without an inheritance tax, if stand to inherit assets from someone who lived in Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania, an inheritance tax may apply. The exact circumstances of your relationship to the person who passed away and the value of the assets inherited. Typically, surviving spouses are exempt from paying inheritance taxes.
Inheritance and estate taxes do not apply universally and vary by state. Be sure to discuss this important issue with your attorney as part of your estate planning process and design your legacy accordingly.