One of the main reasons individuals create comprehensive estate plans is to help their heirs avoid estate taxes. States and the federal government impose these taxes on assets that pass to beneficiaries after the death of a loved one.
However, there is a difference between an inheritance tax, which individual beneficiaries have to pay based on the value of the assets they inherit, and an estate tax, which is the responsibility of the estate as a whole. These are some things you should know.
Inheritance tax
The federal government does not have an inheritance tax law. However, several states do. New Hampshire does not have such a law, but if the inheritance comes from outside the state or the person who receives the assets lives outside New Hampshire, heirs may need to pay taxes. For example, if you or your heirs live in Kentucky, Nebraska, New Jersey, Pennsylvania, Maryland or Iowa, they may have to pay state inheritance taxes.
Exemptions to inheritance tax
The value of the assets inherited determines the amount of inheritance tax your loved ones pay. However, those who receive lower, e.g., assets worth less than $25,000, are exempt from these taxes. In addition, in most cases, spouses, direct descendants and charities receive either complete or partial exemptions.
Estate taxes
If your estate is worth more than $12 million, the federal government may levy an estate tax unless your spouse is the sole beneficiary. In addition, 12 states have estate tax laws, but New Hampshire is not one of them. Your estate may be subject to federal estate tax as well as state estate and inheritance taxes.
State and federal governments withdraw estate taxes before any asset distribution. Fortunately, your heirs will not have to pay income taxes on their inheritances.
