Once an individual passes away, their assets could be subject to estate taxes and inheritance taxes, depending on where they lived and how much they were worth. While the danger of estate taxes and inheritance taxes does exist, the truth is that the vast majority of estates are too small to be charged a federal estate tax, which, as of 2021, applies only if the assets of the deceased person are worth $11.70 million or more. That exemption increases to $12.06 million in 2022.
The number of jurisdictions with these levies is dropping, as political opposition has risen to what some criticize as death taxes. Because of this, a dozen states plus the District of Columbia continue to tax estates, and a half dozen levy inheritance taxes. Maryland collects both.
Just like with federal estate tax, these state taxes are accumulated only beyond specific thresholds. And even at or above those levels, your relationship to the decedent—the person who passed away—may limit you from some or all inheritance tax. Notably, surviving spouses and descendants of the deceased rarely, if ever, pay this levy. Reach out to our skilled Western Pennsylvania elder law & estate planning attorneys to learn more.
What are estate taxes?
For tax purposes, these levies, both federal and state, are set on the estate’s fair market value (FMV), instead of what the deceased initially paid for their assets.
While that means any appreciation in the estate’s assets over time will be taxed, it also protects against being taxed on peak values that have since dropped. For example, if a house was bought at $5 million, but its current market value is $4 million, the latter amount will be used.
Anything in the estate that is bequeathed to a surviving spouse is not counted in the total amount and isn’t subject to estate tax. The right of spouses to leave any amount to one another is referred to as the unlimited marital deduction. Though when the surviving spouse who inherited an estate dies, the beneficiaries may then owe estate taxes if the estate exceeds the exclusion limit. Other deductions, including charitable donations or any debts or fees that come with the estate, are also not contained in the final calculation.
An heir expected to receive money or assets can decide to decline the inheritance through the use of an inheritance or estate waiver. The waiver is a lawful document that the heir signs, declining the rights to the inheritance. In this example, the executor of the will would then name a new beneficiary of the inheritance. An heir might decide to waive their inheritance to avoid paying taxes or to avoid having to maintain a house or other structure. A person in a bankruptcy proceeding might also decide to sign a waiver so that the property cannot be seized by creditors. State law determines how the waivers work.
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