Wills and Estate Planning

What's the difference between inheritance tax and estate tax?

We can't escape taxes. Even after we're gone, our loved ones may have to pay taxes on the hard-earned money we left them. Or do they? Learn about inheritance and estate taxes and consult your financial advisor.

Understand the difference while planning your estate

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, it's important to note that not all states are subject to an inheritance tax. As of 2014, the six states that impose an inheritance tax include Nebraska, Iowa, Kentucky, Pennsylvania, Indiana, and Tennessee. Additionally, Maryland and New Jersey have both inheritance and estate taxes.1

The main difference between an inheritance and estate taxes is in who is responsible for paying it. 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. Note: Heirs will not be held liable for the taxes, unless the executor fails to pay them.

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, and isn't seriously diminished by taxes.

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.


1. http://taxfoundation.org/blog/state-estate-and-inheritance-taxes-2014

Was this article helpful?
1
0

All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax‐related decisions. For information about Protective Life and its products and services, visit www.protective.com.

Companies and organizations linked from Learning Center articles have no affiliation with Protective Life or its subsidiaries.

Estate Planning

Understanding estate and inheritance taxes can be vital to solid estate planning. If you don't plan accordingly, your loved ones may be forced to pay more inheritance tax, and not receive what you intended for them. This article presents the basic difference between estate and inheritance taxes so that you can be better informed when it comes to estate planning. For more information, visit the Protective Life Learning Center.

WEB.1759.10.15