What’s the Difference Between Inheritance Tax and Estate Tax?

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How Do You Know Whether You Owe Estate or Inheritance Tax?

Estate taxation can be a complex topic and is one you may want to speak to an experienced attorney about. An estate planning lawyer can help you understand the tax implications of your estate and how you wish to pass on wealth in the future. They can also help you create protection for your assets against taxes, creditors, and other situations using trusts and other legal options.

The basic concept — and thresholds — associated with both estate and inheritance taxes are a bit easier to explain than they are to implement in specific situations.

What Is an Estate Tax?

An estate tax is charged when property is to be transferred from an estate to its beneficiaries and heirs after a person passes away. It is a tax that is paid by the estate itself, which means the tax obligation is supposed to be handled prior to any remaining assets being distributed to heirs.

What Is an Inheritance Tax?

An inheritance tax is also levied at the time property transfers from an estate to heirs or beneficiaries. However, this tax is not paid out of the estate before the property transfers. It is paid by the heirs after the property transfers.

Will You Pay an Estate or Inheritance Tax in Tennessee?

As of 2023, Tennessee does not levy a state estate or inheritance tax. However, depending on the size of the estate, you might still contend with a federal estate tax.

The Previous Tennessee Inheritance Tax

Prior to 2016, Tennessee did impose an inheritance tax. If someone passed away in 2015 or before that and their estate had a net value over a certain threshold, the state inheritance tax kicked in.

In 2015, that threshold was $5,000,000. In 2014, it was $2,000,000. In 2013, it was $1,250,000. In short, the threshold tended to be set so that only the largest of estates would be impacted.

The Federal Estate Tax

The federal government does levy an estate tax. However, this tax is only levied on the largest of estates. If someone passes away in 2023, for example, the estate must be worth $12,920,000 for the estate tax to apply.

Here are the thresholds for federal estate tax for the previous 10 years:

  • 2022 – $12,060,000
  • 2021 – $11,700,000
  • 2020 – $11,580,000
  • 2019 – $11,400,000
  • 2018 – $11,180,000
  • 2017 – $5,490,000
  • 2016 – $5,450,000
  • 2015 – $5,430,000
  • 2014 – $5,340,000
  • 2013 – $5,250,000

Are There Other Taxes You Should Be Concerned With?

Numerous taxes must be considered when planning for the future and for your estate. For example, even the income tax can be a consideration, and those who are looking to build generational wealth or set aside plenty of funds for retirement may want to speak to professionals about how to minimize year-to-year tax burdens.

Some additional taxes that are relevant to estate planning include:

  • Gift tax. You can give assets, including money, to your loved ones while you are alive as a way to reduce the value of your estate or support loved ones immediately. However, if your giving to any individual reaches above a certain threshold (in 2023, above $17,000), it can trigger a hefty federal gift tax (in 2023 that tax is 40%). If you’re looking to give large-value gifts to others, consider consulting a lawyer first to ensure you understand the implications of that gift on you and them.
  • Generation-skipping tax. The generation-skipping tax is a little-known and, in truth, fairly uncommon tax. It’s levied when someone leaves assets directly to their grandchildren (or great-grandchildren). However, the value of the assets has to exceed a certain amount — as of 2023, the threshold was more than $12.92 million, so most people don’t trigger this tax.
  • Capital gains taxes. Make sure you understand how capital gains taxes might impact your heirs if you are leaving them property such as homes or stocks. If they attempt to sell that property later, they might be surprised by a sizeable capital gains tax if the value of the asset has significantly increased since you bought it.

Can You Avoid Estate Taxes?

Luckily, in Tennessee, most people don’t have to worry about estate taxes. The state doesn’t charge estate or inheritance taxes, so you may only have to worry about whether an estate crosses the threshold for federal taxes. If you are dealing with out-of-state assets or estates, however, there’s a chance that another state’s laws might impact your estate tax situation.

One of the best things you can do to support a higher chance of a positive outcome with estate tax issues is to consult an experienced estate lawyer. Your attorney can help you understand what estate taxes you might need to be worried about. If you start estate planning early, they can provide guidance on strategies to reduce the value of your estate or otherwise mitigate estate taxes that could impact how much your heirs receive.

Obviously, it’s especially important to consider these matters and to have a plan moving forward if you have a large estate that might cross the federal threshold.

For more information about estate and tax planning services, reach out to Crow Estate Planning & Probate. Call us at 931-213-7940 to make an appointment so we can learn about your situation and tell you how we might be able to help.

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