Understanding Inheritance and Estate Taxes

Understanding Inheritance and Estate Taxes


If you inherit an estate from a loved one, it’s important to understand how taxes may affect these assets. The total value of assets within the estate and the relationship of the heirs to the deceased typically determine the amount of estate tax and inheritance tax levied.

Estate Tax vs. Inheritance Tax

The key difference between estate tax and inheritance tax is who pays it. The federal government levies an estate tax on the net value of property owned by the decedent at their death. Not every estate will pay an estate tax. Estates must be of a certain value before the federal government requires an estate tax.

The federal government does not levy an inheritance tax, but 6 states do as of 2016. Inheritance taxes only come into play after an executor distributes assets to heirs. Each beneficiary may then have to pay inheritance tax based on his or her specific inheritance tax rate.

Estate and Inheritance Taxes for Spouses and Non-spouses

Generally, spouses may inherit an unlimited amount of assets free of federal estate taxes. Estates bequeathed to non-spouses may be subject the estate to federal estate taxes and the beneficiary to state inheritance taxes.

As of 2017, the federal estate tax exclusion amount is $5.49 million. Congress establishes this exemption and may change it in future legislation to adjust for inflation. The value of a decedent’s estate is determined as of the date of their death, or alternatively, six months after their death.

Estates worth more than the exemption amounts are subject to federal estate taxes. Currently, the top federal estate tax rate is 40% for 2017. Many states impose estate tax thresholds and tax rates that differ from those at the federal level. An estate planning attorney can advise you on taxation issues in your area.

Special Rules for IRAs

In most instances, spouses who inherit IRAs may treat the IRA as their own and must begin required minimum distributions (RMDs) after age 70 ½. For tax purposes, RMDs taken annually fall into the category of ordinary income.

Unlike married couples, non-spouses may not delay RMDs until they reach age 70 ½. Non-spouses may transfer the IRA assets into an inherited IRA titled specifically for that purpose. When taking distributions (taxed as ordinary income), a non-spouse may empty the account over a five-year period. A second option is to take annual distributions with the amount determined by the account balance and the beneficiary’s life expectancy. The latter strategy may permit a larger portion of the account to grow tax-deferred.

Inheritance taxes are a complicated issue. When determining how inheritance taxes apply to you, an experienced estate planning lawyer could be your most valuable asset.

Fifth Third Bank does not provide tax or legal advice. Please consult your tax adviser or attorney before making any decisions or taking any action based on this information. This information is provided for educational purposes only and does not constitute the rendering of tax or legal advice. Fifth Third Bancorp provides access to investments and investment services through various subsidiaries, including Fifth Third Securities. Fifth Third Securities is the trade name used by Fifth Third Securities, Inc., member FINRA/SIPC, a registered broker-dealer and a registered investment advisor registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Securities and investments offered through Fifth Third Securities, Inc. and insurance products: Are Not FDIC Insured | Offer No Bank Guarantee | May Lose Value Are Not Insured By Any Federal Government Agency | Are Not A Deposit Insurance products made available through Fifth Third Insurance Agency, Inc. © 2018 Fifth Third Bank Excerpt from Fifth Third Bank LegacyLink.