Many people have heard of estate taxes, and you may assume that an estate tax and an inheritance tax are the same thing. In fact, these are two different forms of taxation. In this post we will explain exactly who must pay inheritance taxes, and we will also look at the differences between an inheritance tax and an estate tax.
Inheritance Tax
An inheritance tax is levied on each individual asset transfer. If you named five different nonexempt inheritors in your last will, an inheritance tax could be levied on transfers to each respective heir.
The good news is that there is no inheritance tax on the federal level, though there is an estate tax. Most of the states in the union do not impose inheritance taxes either, but there are a few states that do levy state-level inheritance taxes.
Our firm practices law in the state of Connecticut, and there is no state-level inheritance tax in our state. For your information, the states that have state-level inheritance taxes are Maryland, Iowa, Kentucky, Nebraska, New Jersey and Pennsylvania.
Though there are inheritance taxes in these states, there are exemptions. In most states, close relatives like spouses, parents, and children are going to be exempt from state level-inheritance taxes.
Federal Estate Tax
Now that we have provided an explanation of what inheritance taxes are all about, we can move on to an explanation of the death taxes that you may face as a resident of the state of Connecticut.
An estate tax is levied on the the entirety of the taxable portion of the estate before it is distributed among the heirs. It is not imposed on each individual asset transfer.
There is a federal estate tax that is applicable in Connecticut and every other state in the union. Most people are not required to pay the federal estate tax, because there is a somewhat robust credit or exclusion. If your assets do not exceed the amount of this exclusion, you are not exposed to the federal estate tax.
At the time of this writing in 2016, the exact amount of the federal estate tax exclusion is $5.45 million. This figure is derived from a base of $5 million that was put in place for the 2011 calendar year. Subsequent adjustments to account for inflation have been applied on an annual basis since then. Another adjustment could be applied next year, so you may see a somewhat higher figure in 2017.
It should be noted that there is an unlimited marital estate tax deduction. If you are married, you can leave unlimited monetary resources to your spouse without incurring any federal estate tax exposure. This applies to legally married same-sex couples as well as opposite sex couples.
A caveat to the above should be added. The unlimited marital estate tax deduction is only available to citizens of the United States. If you are married to someone who is not a citizen of this country, you cannot utilize the unlimited marital estate tax deduction.
The maximum rate of the federal estate tax is 40 percent at the present time.
Connecticut State Estate Tax
People who live in our state are well aware of the fact that they face quite a bit of taxation. Some of the states impose state-level estate taxes, and Connecticut is one of them.
The state-level estate tax exclusion is quite a bit lower than the federal estate tax exclusion. As a result, your estate could face state-level exposure even if you are federally exempt. At the time of this writing in 2016, the Connecticut state estate tax exclusion is $2 million. On the state level, the top rate is 12 percent.
Explore Tax Efficiency Strategies
When you factor in the value of your home and any other real estate that you may own along with your life insurance policies, you can be exposed to death taxes on some level even if you do not consider yourself to be extraordinarily wealthy. If your estate is going to be subject to taxation, you do have options when you are devising your legacy plan.
There are a number of different legal structures that are typically used by people who are looking for estate tax efficiency. The ideal tax efficiency strategy will depend upon the nature of your assets, your family dynamic, and your overall objectives.
Our firm can help if you would like to discuss estate tax efficiency with a licensed professional. To set up a consultation, send us a message through our contact page or call us at 860-548-1000.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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