Some people have a tendency to use the terms “estate tax” and “inheritance tax” interchangeably, but the two are actually very different things.
“Estate Tax” refers to a federal or state tax that’s assessed on the estate of a deceased individual, provided that the value of the estate is more than a certain threshold.
Not all states impose an estate tax. And, as for the federal estate tax, it’s been repealed for the year 2010, but it’s scheduled to make a comeback on January 1, 2011. And, unless Congress enacts legislation to change things, starting next year, estates valued at more than $1 million will be subject to the tax.
So, when you pass away owning enough property to be subject to an estate tax, it’s your estate – usually through your personal representative – who will write the check for the tax bill.
“Inheritance Tax”, on the other hand, is a tax assessed by certain states. And, instead of the decedent’s estate writing the check for the tax bill, it’s those who inherit from the decedent that are subject to the tax. Often, a spouse or child will pay a lower inheritance tax than a beneficiary who wasn’t as closely related to the decedent.
So, when a beneficiary inherits money or property, he or she may be taxed on the amount inherited. And it’s the beneficiary, not the decedent’s estate, who’s responsible for paying the inheritance tax.
What About Texas?
If you’re a Texas resident, you can breathe a sigh of relief that you don’t have to worry about paying inheritance taxes or estate taxes, at least on the state level – Texas doesn’t impose them.
But, if your net worth is more than $1 million, you should consult with your estate planning attorney about the need for federal estate tax planning.