Estate Taxes, Inheritance Taxes, Death Taxes … Which is Which?
The terms estate tax and inheritance tax are often used interchangeably by the less-informed, but they are distinct terms with different legal meanings. Technically, there is not an additional “death tax,” but the term is sometimes used to refer to estate or inheritance taxes, or both.
Estate taxes are based on the total value of the estate after creditors and expenses are paid but before any heirs get their bequests. Permissible expenses include funeral and administrative costs. The executor or administrator of the estate files the estate tax return and any tax due is paid from estate funds. The federal government gets a maximum of 35 percent of the remaining value of the estate.
Inheritance tax in incurred by the heirs after they receive payouts from the estate. The tax is based on the amount received. If any tax is due, the heir is responsible for paying it. Inheritance taxes are a matter of state law rather than federal law, so they vary by state. Commonly, inheritance taxes are lower for spouses and children of the deceased.
Depending on the location of estate property, an estate can incur both estate taxes and inheritance taxes. The good news is that every estate gets a federal estate tax deduction for all property received by the deceased's spouse, as well as a $5 million standard exemption for all other property. Thus, most Americans' estates will not owe federal estate tax.
Those states with inheritance taxes frequently tax spouses and children of the deceased at lower rates than other heirs, but again, it depends on where the property is located. At this time, Texas does not have an estate tax of its own or an inheritance tax.
If you are dealing with a complicated estate or want to learn about structuring your estate to minimize estate taxes, call an experienced estate planning lawyer at the Peterson Law Group. Our experienced Conroe, Texas attorneys help clients develop comprehensive estate plans, including drafting will and various trusts to fit their estate planning needs. Call us at 936-337-4681 or 979-703-7014 or contact us online to arrange an appointment.