Inheritance Tax & Estate Taxes: How Do They Impact Estate Planning?

Upon death, a person’s assets may be subject to inheritance taxes, estate taxes, or both depending on what US state they were living in at the time of death and how much their total assets are worth.

In this article, we’ll explore the differences between inheritance and estate taxes, how they differ among states and at the federal level, and how you can plan your estate in Florida so the lion's share of your assets legally passes along to your heirs and not to the government.      

What is an Inheritance Tax?

An inheritance tax is a state tax on assets that have been inherited from a person who has died. Inheritance taxes are paid by the person who inherited the assets at rates that can vary based on the size and value of the inheritance as well as the inheritor’s relationship with the person who died.

Only six US states currently impose inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa has begun the process of phasing out its state inheritance tax and plans to eliminate the tax completely for deaths occurring after January 1, 2025.  

What is an Estate Tax?

An estate consists of an accounting of everything a person owns or has certain interests in at the date of death.

An estate tax is a federal and state tax that is levied on the net value of a deceased person’s estate before it is distributed to their heirs. It is a tax on the transfer of property and other assets after the original possessor’s death.

As is the case with inheritance taxes, only some states in the US impose estate taxes. They are​​Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Washington D.C also imposes estate taxes.

Estate taxes only apply to a taxable estate calculated as the value of the gross estate, which is the fair market value of all of the estate’s assets minus certain deductions including the value of mortgages, debts, and any assets that are passed on to a surviving spouse or qualified charity.

Federal estate tax–which is levied by the US government–is due regardless of where the deceased resided if the estate’s value exceeds the federal estate tax exemption, which is currently$12.06 million for deaths that took place in 2022 and $11.7 million for 2021 deaths.  

If, however, the total value of a deceased person’s estate is less than $12.06 million (or $11.7 million if the person died in 2021) the estate is exempt from federal estate taxes.

Federal estate tax rates range from 18% to 40% of the taxable amount of the estate. In most federal estate tax tiers, the estate will pay a base tax plus a marginal rate.

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Source: Internal Revenue Service

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Inheritance Tax Vs Estate Tax: What is the Difference?

Inheritance tax and estate tax are two different kinds of taxes, as we’ve defined in the sections above. Inheritance tax is what the person who inherited the assets(the beneficiary) pays when he or she receives them. An estate tax is an amount taken out of someone’s estate upon their death.

While there is no federal inheritance tax in the US, there is a federal estate tax that generally applies (as we discussed in the previous section) to assets valued at over $12.06 million for people who died in 2022, and for $11.73 million for deaths in 2021.

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Florida Inheritance Tax and Estate Planning

Florida is one of several states in the US that does not impose inheritance or estate taxes. Unless you are very wealthy–with an estate worth more than $12.06million dollars–you will not pay estate taxes of any kind (even federal) if you are a Florida resident at the time of your death.   

The Sunshine State does, however, possess a considerable population of high net-worth individuals in the twilight of their lives whose taxable estates, were they to unfortunately die today, would exceed the federal estate tax exemption threshold of $12.06 million. 

That’s where a well-designed estate plan created by a trusted financial advisor can help an individual legally reduce estate tax liability and transfer more wealth to his or her heirs.

Such a plan might include several methods to reduce the value of an estate to avoid or lower federal estate taxes, including:

●     Gifting assets

●     Making charitable donations

●     Moving assets into an irrevocable trust (such as an asset protection trust)

●     Using marital deduction to pass the estate to a spouse

Even after its overall value is reduced with an estate plan, if the estate’s value is more than the federal exemption of $12.06million, the estate will be subject to the federal estate tax.

As Benjamin Franklin told us in 1789, the only certainty in life is death and taxes. In 2022, he’s right about the former. As for the latter concerning federal estate taxes in Florida, a trusted financial adviser who’s an expert in estate tax law may be able to help you prove Mr. Franklin wrong.

1.     On May19, 2021, the Iowa Legislature passed S.F. 619, a law that will phase out inheritance taxes at a rate of 20% per year, and completely eliminate the tax by January 1, 2025.

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The information in this article is not a substitute for professional legal or tax advice. Please contact a qualified attorney for legal advice and or a certified tax expert if you have questions concerning inheritance or estate taxes.    

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