What is the Difference Between Estate and Inheritance Taxes?

We often hear the terms inheritance taxes and estate taxes used interchangeably, but these are actually two different taxes that can occur when property transfers upon the death of an individual. The most significan difference between inheritance and estate taxes is in how they are assessed – estate taxes are levied upon the value of the entire estate of the deceased, while inheritance taxes are levied only on each beneficiary or heir’s portion of the estate.

Estate Taxes

The term estate tax refers to the federal estate tax assessed on the value of the entire estate. The federal estate tax is front and center in the news for 2010, as it was technically repealed for this year. The year 2011 will see the federal estate tax return with a vengeance, for without Congressional action, estates may be taxed up to a rate of 55%. This tax is paid by the estate, specifically by the Executor of the estate during the probate process, which is the legal process that administers an estate.

Inheritance Taxes

An inheritance tax is assessed only on the value of the beneficiary’s share of the estate, and that beneficiary is normally responsible for that tax burden. The inheritance tax will come into play if the deceased, any beneficiary or any property is located in a state that has an inheritance tax.

There are only ten states in the country that still collect inheritance taxes, they are:

  • Indiana;
  • Iowa;
  • Kentucky;
  • Maryland;
  • Nebraska;
  • New Jersey;
  • Oregon;
  • Pennsylvania; and
  • Tennessee.

While property that is passed to a surviving spouse normally is not taxed, there are several estate planning tools that address both estate and inheritance taxes. As the laws vary by state, it’s important to contact a Colorado estate planning attorney for drafting a will, creating a trust or any aspect of creating an estate plan.

Author Bio

Catherine Hammond is the CEO and founder of Hammond Law Group, a Colorado-based estate planning law firm she founded in 2005. With a strong focus on protecting families from the legal consequences of disability and death, she creates comprehensive estate plans that minimize taxes, costs, and government interference.

A native of Denver, Catherine completed her undergraduate studies at Coe College in Iowa, and her Juris Doctorate from the University of Denver College of Law in 1993, concentrating on estate planning, tax, and mediation. Catherine is a member of various professional organizations, including WealthCounsel, ElderCounsel, the National Academy of Elder Law Attorneys, the Colorado Springs Estate Planning Council, and the Purposeful Planning Institute. Beyond her legal expertise, Catherine provides transformational coaching to support clients and their families through life transitions.

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