Generally speaking, inheritances are not subject to regular income taxes, so you get a break on that level. However, there is a federal estate tax that can take a heavy toll on your legacy, because it carries a 40% maximum rate.
That’s the bad news, but the good news is that you are probably not exposed. There is a federal estate tax credit or exclusion that exceeds $11 million at the time of this writing. This is the amount that can be passed along before the estate tax would kick in.
The estate tax is potentially applicable on transfers to anyone other than your spouse. If you are married to an American citizen, you can transfer unlimited assets to your spouse free of taxation.
Our offices are in Vermont and New York, and there are state-level estate taxes in these two states that exist apart from the federal tax. The exclusions are considerably lower than the federal estate tax exclusion, so you could be exposed on the state level even if you are federally exempt.
There is a federal gift tax that has been in place since 1932, and the gift tax and the estate tax are unified under the tax code. As a result of this arrangement, the exclusion is a unified exclusion that encompasses lifetime gifts along with the estate that will be transferred after your passing.
On the state level, New York and Vermont do not have gift taxes.
Getting back to the federal transfer taxes, there are some additional gift tax exclusions that are separate from the unified lifetime gift and estate tax exclusion. There is an annual gift tax exclusion that allows you to give up to $15,000 to an unlimited number of gift recipients each year tax-free.
If you want to pay school tuition for students, there would be no taxes to pay, but you would have to remit the payments directly to the schools. This is a tuition only exclusion that does not include books, fees, and living expenses. There is a medical exemption as well that allows you to pay health care bills for others without incurring any tax liability.
These are actually two different types of taxation, though many people naturally assume that they describe the same thing. As we have stated, an estate tax would be applied on the entirety of the taxable portion of an estate before it is transferred to the heirs.
The arrangement is quite different with an inheritance tax. It would be imposed on transfers to each inheritor that is not exempt. As a result, there could be multiple impositions of an inheritance tax when one estate is being administered.
There is no federal inheritance tax, but there are a few states that have state-level inheritance taxes. Fortunately, New York and Vermont are not part of this group.
Yes, there are estate tax efficiency strategies that can be implemented. The ideal course of action will depend upon the circumstances, so personalized attention is key. Generally speaking, assets that have been conveyed into an irrevocable trust would be removed from your estate for tax purposes. There are a number of them that can be used to transfer assets at a tax discount.
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Our doors are open if you would like to discuss these matters or any other elder law or estate planning situation with a licensed attorney. We can be reached by phone in Albany, New York at 518-389-6020, and our number in Vermont is 802-879-7133.
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