Estate taxes and inheritance taxes are different based on who is responsible for paying the tax. An estate tax is imposed on the individual giving the property, instead of the person receiving it. Whereas an inheritance tax is imposed on the person receiving the inheritance. Inheritance taxes are not as common as they used to be, but here is what you should know about California inheritance tax.
The definition of an inheritance tax
When an heir or beneficiary receives money or property from an estate, a tax may be imposed on that inheritance. The federal government no longer imposes an inheritance tax, however, there are some states that still do. There is no longer a California inheritance tax. However, if you inherit from someone who lives in another state, you should know the rules. Depending on the type of beneficiary you happen to be, the tax rate may be different. For instance, spouses and lineal heirs are typically taxed at a lower rate than distant relatives or beneficiaries who are unrelated to the deceased. In some states, spouses and lineal heirs pay no inheritance taxes at all.
How are estate taxes determined?
The “gross estate” is all of the money and property owned by the deceased, and it includes cash, securities, insurance proceeds, real estate, annuities, trusts, and business interests. Once an accounting is made of the assets in the estate, applicable deductions are applied, leaving the net amount referred to as the “taxable estate.” The estate tax is then calculated based on a percentage of the taxable estate.
The difference between inheritance and gift taxes
Another concern many clients have is whether or not they will need to pay taxes on a gift from a loved one. You should first understand the difference between gifts and inheritances. A gift is property you receive from someone while that person is still alive. Generally, the person giving the gift is the one who will be responsible for paying gift taxes and reporting that gift to the IRS. The person receiving the gift does not have immediate tax liability. However, there may be future tax consequences, such as when the gift is sold.
Can I reject or disclaim an inheritance?
There are certainly some cases where rejecting an expected inheritance may be a better option. An heir can reject or disclaim an inheritance, but it requires more than simply telling the executor that you do not want the property. In order to ensure that you never become the owner of the property, there are certain rules you need to follow.
How to properly disclaim an inheritance
First of all, the disclaimer needs to be in writing and delivered to the person who is responsible for administering the estate. That would most likely be the executor or trustee depending on the nature of the inheritance property. The disclaimer should typically be made within 9 months of your loved one’s death. The most important thing to remember, in order for the disclaimer to be effective, is that you cannot accept any benefit at all from the property.
Disclaiming an inheritance in order to avoid estate taxes
The current exemption amount, or lifetime credit, is $5.45 million. Estates with a value below that amount do not incur estate taxes. The excess is taxed at 40 percent. Some clients wish to disclaim their inheritance so that they can avoid the potential of owing estate taxes when they die. The reality for some is that the addition of a substantial inheritance may cause that person’s estate to exceed the lifetime exemption amount. When this situation arise, it may be a better choice to disclaim the inheritance. However, before making this decision, discuss your options with your estate planning attorney.
Disclaiming an inheritance to protect government benefits
Another situation that may warrant rejection of an inheritance is when the recipient of the inheritance is also a recipient of state or federal benefits. Eligibility for some benefits may be based on need or have certain income limits. When that is the case, accepting the inheritance could jeopardize eligibility for those benefits, depending on the amount. In some cases, it would be more important to preserve healthcare benefits than to receive the inheritance.
If you have questions regarding inheritance taxes, or any other estate planning needs, please contact the Schomer Law Group for a consultation, either online or by calling us at (310) 337-7696.
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- Understanding and Manipulating Estate and Gift Taxes - June 1, 2023
- What It Means to Disclaim - June 1, 2023
