WHAT IS AN INHERITANCE TAX?
There are a lot of misconceptions out there when it comes to estate planning terms because people make assumptions without seeking expert advice. With this in mind we would like to provide some clarity with regard to the difference between an estate tax and an inheritance tax.
Many individuals assume that these are interchangeable terms but in fact they are two different taxes, and in some cases both of them can be levied.
The estate tax is imposed upon the entirety of the deceased individual's estate. So if you were to receive one fourth of the estate, your share would be distributed out of the remainder that existed after the estate tax was paid. (That is, assuming the estate in question was subject to the estate tax.)
If you lived in a state that had an inheritance tax and you are not exempt, you would then be facing an additional round of taxation. The inheritance that you receive would be taxed, and depending on the relationship of each heir to the deceased the other people receiving inheritances may have to pay this tax as well.
It should be noted that the federal estate tax is applicable in all 50 states. But there are some states that impose an estate tax on the state level as well.
New Jersey and Maryland have an estate tax on the state level and an inheritance tax. So some people in these states are subject to a federal estate tax, a state estate tax, and an inheritance tax.
Fortunately here in California we do not have a state estate tax or an inheritance tax; we need only concern ourselves with the federal estate tax. However, that tax carries a 35% rate so it is something to take very seriously.
To discuss tax efficiency strategies with a professional, take action right now to arrange for a consultation with a licensed and experienced San Bernardino estate planning lawyer.