I find that a lot of retired and active duty military officers have questions about transfer taxes. One of the most confusing is the difference between inheritance and estate taxes. Let’s see if I can help with that a bit.
Estate Taxes are paid by the estate based on the overall value of the estate. The Federal Government imposes an Estate Tax. Fortunately, the tax is only levied on estates valued at more than $11.4 million so most of us won’t be subject to it (although it would be a good problem to have). It is important to note that a married couple can transfer up to $22.8 million without an estate tax due, if everything is done correctly. It is also important to note that an unlimited amount can be transferred between spouses without an estate tax bill.
Twelve states have an estate tax. They vary quite a bit. Some states start taxing estates that exceed as little as $1 million. Others link their limit to the Federal exemption amount. You may want to consider state estate taxes when you pick the place you’re going to settle down after you retire from the military.
Inheritance taxes, unlike estate taxes, are based on who receives the money and not the overall value of the estate. There is no inheritance tax at the Federal level. Six states impose inheritance taxes (Maryland has both an inheritance and an estate tax).
The amount of the inheritance tax is based on the relationship between the person who receives the money and the deceased. They’re also based on where the person who died resided, not where the person who receives the inheritance lives. Normally, spouses inherit money with no inheritance tax and in some states lineal descendants don’t pay inheritance tax either.
Taxes levied on the inheritance can be as low as 1% and as high as 18% depending on the state and the relationship to the deceased. While technically the person who inherits the money is responsible for the tax, many states require the executor (or potentially the Trustee) to withhold and pay the tax to make sure they get paid.
Estate Planning is Important
Planning for taxes is part of an effective estate and financial plan. But, it’s not the only reason to keep your estate plan up to date. Working with an estate planning attorney and financial planner will make sure you cover all the bases.
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