Overall, the tax laws that apply to inheritance distributions are favorable to American families. You are not required to report an inheritance as taxable income, and this would include life insurance proceeds. Plus, if you inherit assets that appreciated during the life of the decedent, you do not have to pay capital gains taxes on the appreciation.
On the other side of the coin, if you have been very successful from a financial standpoint, you have to be concerned about a significant level of taxation. We have a federal estate tax in the United States, and it carries an attention-getting 40 percent maximum rate.
The reason why it is only a factor for high net worth individuals is because there is a credit or exclusion that is exceeds the value of the vast majority of estates. The exclusion is the amount that can be transferred tax-free, and there has been an adjustment to this credit for 2020.
Last year, it was $11.4 million, and this year it is $11.58 million. Since the estate tax exclusion is portable, a surviving spouse would have two exclusions to utilize if necessary. It should be noted that there is a unlimited marital deduction. This allows for unlimited tax-free transfers between spouses.
There is one caveat to the above statement. In order to use the unlimited marital deduction, the people involved must be American citizens. This being stated, there is an estate planning device called a qualified domestic trust that could be used to gain estate tax efficiency when these circumstances exist.
Federal Gift Tax
You can digest all of the above and simply shrug your shoulders. All you have to do is give gifts to your loved ones while you are living to avoid the estate tax, right? Wealthy people used to do this shortly after the estate tax was established in 1916, but the loophole was closed in relatively short order.
There has been in a gift tax in place continuously since 1932, and during the 70s, it was unified with the estate tax. The gift tax carries the same 40 percent rate, and the $11.58 million exclusion is a unified exclusion that applies to gifts along with the estate that will be transferred after you are gone.
However, there is another gift tax exemption that you can use to transfer a certain amount tax-free before you would have to use any of your unified lifetime exclusion. The annual gift tax exclusion allows you to give up to $15,000 to an unlimited number of people every year free of the gift tax.
State-Level Estate Taxes
We have offices in New York and Vermont, and there are state-level estate taxes in these two states. Since the exclusions are lower, you could face exposure on the state level even if you are exempt from the federal estate tax. There have been changes in the exclusion amounts in these respective states for 2020.
In New York, the state level exclusion is now $5.85 million, which is an increase from the $5.74 million that was in place last year. The Vermont exclusion has gone up from $2.75 million to $4.25 million. The maximum rate is 16 percent in both states.
Schedule a Consultation Today!
We are here to help if you would like to discuss taxation or any other estate planning matter with a licensed attorney. You can rest assured that you will feel at ease from the first moment that you walk through our doors, and we will provide you with focused, personalized attention.
To schedule a consultation appointment in Essex Junction, Vermont, give us a call at 802-879-7133. The number in Albany, New York is 518-389-6020, and we have a contact form on this website that you can use to send us a message to either office.