Is a Death Tax the Same as an Inheritance Tax?

Estate tax, death tax, income tax and inheritance tax: what do they mean for your estate and your heirs? You’ll want to be sure to know the difference between them, as you create your estate plan.

Most people don’t have to worry about the federal estate tax, which is often referred to as the death tax. Unless your estate is valued at more than $11.4 million ($22.8 for couples), you won’t be paying this tax. However, says Forbes in a recent article, “Eight Things You Need To Know About The Death Tax Before You Die,” that doesn’t mean your estate and your heirs won’t have to pay income taxes or inheritance taxes.

Assets in your name only and everything else you had control over will be added into your gross estate. For example, all stocks, bonds, bank accounts and life insurance death benefits are included, as well as any real estate, business interests, jewelry, household furnishings and artwork.

Note: just because your family avoids probate with your estate, doesn’t mean they won’t have to deal with estate tax. For instance, life insurance is in your gross estate, if you owned or could control the policy. IRAs and 401(k)s are also included in your gross estate. Just because these assets aren’t included in the estate because they have a named beneficiary, it doesn’t mean they’ve avoided estate tax. It depends upon the level of control you had over the assets.

If you owned property jointly with a spouse, half of the home’s value is included in the gross estate. If you owned property jointly with someone else (not your spouse), then 100% of the value is included in the gross estate—unless you can prove that the other party contributed some or all of the value.

If you’re the beneficiary of a trust your parents created for you, those assets may be included in your gross estate, if you have certain rights over the trust assets.

If you’re married to a U.S. citizen, you get an unlimited marital deduction for all of the assets you leave to your spouse. However, some states impose their own estate tax, which may require additional planning. For example, Massachusetts has a $1 million estate tax exemption. A tax may be levied in a state where you own real estate, whether or not you are a full-time or part-time resident.

One of the important aspects of estate planning is tax planning. Speak with an experienced estate planning attorney about the potential tax liabilities of your estate and what strategies may work best to minimize taxes before you die.

Reference: Forbes (May 20, 2019) “Eight Things You Need To Know About The Death Tax Before You Die”