It can sometimes seem as though you are taxed at every turn, and taxation potentially comes into play when you are planning your estate. We will look at the matter in this post.
Inheritance Recipients
If you are the recipient of an inheritance, do you have to pay income taxes on this windfall? This is certainly a good question. Generally speaking the answer is no, you do not have to report an inheritance on your annual income tax return.
There is however a caveat with regard to the inheritance of appreciable assets. The appreciation could well be taxable.
Inheritance Tax and Estate Tax
There is no inheritance tax on the federal level, but there are a few states that levy an inheritance tax on the state level. Connecticut does not impose an inheritance tax.
For the sake of clarification, an inheritance tax is levied on each individual inheritor who is not exempt. In states where there is such a tax, if there were five different nonexempt inheritors receiving a portion of an estate, each individual would be forced to pay an inheritance tax.
Now let’s look at estate taxes. There is a federal estate tax, and it carries a 40 percent maximum rate. The amount of the federal estate tax exclusion is $5.34 million. If you are transferring assets that exceed this amount, your estate is potentially exposed to the tax.
The inheritors would not be directly paying the tax, but the estate would be taxed before inheritances were distributed. Therefore, the inheritances would be indirectly taxed.
In addition to the federal estate tax, some states impose state-level estate taxes. Connecticut does in fact have a state-level estate tax. The exclusion in the state of Connecticut in 2014 is $2 million. High net worth families that live here in Connecticut are faced with the prospect paying estate taxes on the state level and the federal level.
Tax Planning
There is a lot to take into consideration from a tax perspective when you are planning your estate if you have accumulated a significant store of wealth. The imposition of death taxes can certainly reduce the financial underpinning that you are leaving behind to your loved ones.
The good news is that you can control the damage if you take all the right steps in advance. There are tax efficiency strategies that can be implemented to mitigate your exposure to transfer taxes.
If you would like to explore your options, we invite you to contact us to schedule a free consultation. We will gain an understanding of your financial situation and your family dynamic, become apprised of your wishes, and explain your options to you.
You can ultimately construct a tailor-made wealth preservation plan that ideally suits your needs.
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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