If you've inherited money or property after a loved one dies, you may be subject to an inheritance tax. This is a state tax in which the beneficiary (the person or persons who receive money or property from the estate of a deceased person), must pay. Unlike the federal estate tax (where the estate pays the taxes), inheritance taxes are the responsibility of the beneficiary of the property. This tax is calculated separately for each beneficiary, and as such, each beneficiary is responsible for paying his or her own inheritance taxes.
For estate planning purposes, purposes, it's important to note that not all states are subject to an inheritance tax. As of 2020, the six states that impose an inheritance tax include Nebraska, Iowa, Kentucky, and Pennsylvania. Maryland is the only state to impose both an inheritance and estate tax.1
The main difference between an inheritance and estate taxes is the person who pays the tax. . Unlike an inheritance tax, estate taxes are charged against the estate regardless of who inherits the deceased's assets. The executor is responsible for filing a single estate tax return and pays the tax out of the estate's funds. An estate tax is calculated on the total value of a deceased's assets, and is to be paid before any distribution is made to the beneficiaries.
Taxes, whether inheritance or state, must be considered in estate planning. By doing so, you can plan ahead to ensure that more of your legacy goes to those you love.
Note: This article is to provide general education on estate planning and not as legal advice. For more information, consult with an estate planning attorney located in your state, particularly if you move from one state to another.