Inheritance taxes and estate taxes are both called death taxes; however, they aren’t exactly the same thing. An estate tax gets levied against the owner’s assets before they are distributed to heirs. An inheritance tax is actually levied against some heirs after they are distributed and need to be reported on state income tax forms.
The federal government and some states have estate taxes. According to the Tax Foundation, six states have an inheritance tax. These are Nebraska, Kentucky, Iowa, Pennsylvania, New Jersey and Maryland. As a note, New Jersey and Maryland have both state inheritance taxes and state estate taxes.
Inheritance taxes and estate taxes are both called death taxes, but they aren’t the same thing.
Take Steps to Protect Your Family From Inheritance Taxes
However, Forbes reports that many states have much lower exemptions and estate planning may need to account for them. This is true for many fairly high-net-work families that don’t consider themselves ultra-rich. Inheritance taxes can be more difficult to control because they don’t depend upon as much upon the size of the estate; they may also depend upon who the heirs are. Also, state laws different, so rules for your heirs might be different than your own local laws. In some cases, this can make estate planning fairly complex.
However, there are some general tactics that can help preserve the value of the assets that you hope to leave to your family and other beneficiaries:
- Distribute assets early: You may be able to pass some assets on to beneficiaries as gifts before you pass away. You might consider this for family heirlooms, business assets, and other things that aren’t easily converted to cash. Some kinds of family businesses might also be exempt from death taxes. In some cases, gift taxes may need to be considered if you plan to give away very valuable assets or large sums of money.
- Leave your estate to people with exemptions: Typically, spouses have exemptions from inheritance taxes. Children, particularly dependent or disabled children, may also qualify for larger exemptions than heirs that are not members of your family.
- Use life insurance to transfer wealth: Proceeds from life insurance policies do not usually trigger taxes. That is one reason why sophisticated and wealthy people use life insurance as a means to preserve assets and transfer wealth. Permanent life insurance can be one of the simplest and most effective ways to leave money to the beneficiaries of your choice without worrying about paying taxes. It can pass on the value of your estate as cash to the people that you name as heirs in whatever proportion that you choose.
Learn Why Sophisticated Estate Planners Rely Upon Permanent Life Insurance to Transfer Wealth
Would you like to simplify estate planning? You might do that with a permanent life insurance product that can help you preserve and access your wealth while you are still enjoying your life. At the same time, this kind of cash-value insurance can help you transfer the most wealth to your heirs. You can set up a free consultation today by calling or emailing Paradigm Life. Simply visit the Paradigm Contact page to get started.
Q: What are effective ways to help a family avoid inheritance tax?
A: The article outlines strategies like distributing assets early as gifts, leaving estates to people with tax exemptions (like spouses or dependent children), and using life insurance for wealth transfer, as its proceeds are typically tax-free.
Q: How can early distribution of assets aid in avoiding inheritance tax?
A: By passing on assets like family heirlooms or business assets as gifts before death, one can potentially minimize inheritance tax liabilities.
Q: Why is life insurance a recommended tool for avoiding inheritance tax?
A: Life insurance is effective because its proceeds do not usually trigger taxes, allowing the transfer of wealth to beneficiaries without the burden of inheritance taxes.