The matter of taxation is often misunderstood among people who make assumptions about estate planning. There are various different taxes that could cross your mind, and there is some confusion with regard to what many people referred to as “death taxes.”
First off, we should provide an explanation of the federal estate tax. This tax is not applicable on asset transfers between spouses that are American citizens, but it can come into play when assets are being transferred to anyone who is not your spouse.
Everything that you transfer is not subject to the estate tax, because there is a credit or exclusion. You can use this exclusion to transfer a certain amount before the estate tax would be applied. At the time of this writing in December of 2015, the exclusion is $5.43 million, but it is going up to $5.45 million in 2016 after an inflation adjustment is added.
As you can see from this exclusion, most estates will not be subject to the federal estate tax. You do however have to remember that your real property is part of your estate for tax purposes, and life insurance proceeds are also part of your taxable estate.
If you have not looked into the subject very deeply, you may naturally assume that the terms inheritance tax and estate tax are interchangeable. In fact, these are two different forms of taxation.
As we have stated previously, an estate tax is a levied on the entire portion an estate that exceeds the estate tax exclusion. This tax would reduce the amount of the estate before it is transferred to the heirs.
Things are different with an inheritance tax. This type of tax is imposed on transfers to each inheritor who is not exempt from the tax. As a result, an inheritance tax could be levied multiple different times when a single estate is being administered.
It would be possible for both an estate tax and an inheritance tax to be levied during a given estate administration process. However, this rarely happens, because there is no inheritance tax on the federal level, and there are only a handful of states that have state-level inheritance taxes.
We practice law in the state of Vermont, and there is no state-level inheritance tax in our state. There is a state-level estate tax in Vermont, and the exclusion is considerably lower than the federal exclusion at $2.75 million. Since the exclusion is lower on the state level, your estate could be exposed to the Vermont tax even if it is exempt from the federal tax.
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Our firm can help if you are concerned about death taxes. We offer free consultations, and you can contact us through this page to set up an appointment: Essex Junction VT Estate Planning Attorneys.