If you are the Executor or beneficiary of an estate you have an interest in the value of the estate assets. As the Executor, you will be responsible for paying creditors’ claims and taxes and eventually distributing the estate assets to the intended beneficiaries and/or heirs of the estate. As a beneficiary, you will eventually receive some of the estate assets after all claims and taxes have been paid. One concern both an Executor and a beneficiary will have is whether or not the estate will owe estate taxes. Not only must you consider the impact of federal gift and estate taxes, but in some states an estate may also owe state estate taxes. Some states also tax an inheritance that you receive in the form of an inheritance tax. Fortunately, if you live in New Hampshire, you will not have to worry about state estate taxes or an inheritance tax; however, you should still have a good grasp on how federal estate taxes could impact the estate as well.
The Federal Gift and Estate Tax
Following the death of a decedent, the individual’s estate must go through what is known as “probate.” Probate is the legal process that ensures the assets of the decedent are accounted for and legally transferred to the new owners and that any tax owed by the decedent or the estate of the decedent is paid. All estates are potentially subject to federal gift and estate taxes at the rate of 40 percent. Fortunately, all taxpayers are also entitled to an exemption equal to the lifetime exemption limit before federal gift and estate taxes are levied on an estate. The lifetime exemption limit was permanently fixed at $5 million back in 2012, with an annual adjustment for inflation. For 2017, the lifetime exemption is $5.49 million. The tax applies to all qualifying gifts made during the decedent’s lifetime along with the value of all assets owned by the decedent at the time of death, minus the lifetime exemption amount. For example, if you made lifetime gifts valued at $3 million and owned assets valued at $5 million at the time of your death, you would have $8 million subject to federal gift and estate tax before deducting the lifetime exemption. After the deduction, however, your estate’s value would be $2.55 million, meaning the tax would only be levied on $2.55 million.
What Is a State Estate Tax?
Individual states decide whether or not they will impose a state level gift and estate tax. In fact, the list of states that do impose an estate tax are in the minority and does not include New Hampshire. As of 2016, the following states impose some version of a state level estate tax:
States with some type of estate tax include:
- New York
- Rhode Island
- New Jersey
- District of Columbia
What Are Inheritance Taxes?
Inheritances taxes are even less common than state level estate taxes. An inheritance tax is a tax imposed on the beneficiary of a gift from a decedent. Both federal and state gift and estate taxes are levied on the estate of a decedent and are, therefore, paid by the estate. As such, any estate taxes owed are paid before assets are passed down to beneficiaries and/or heirs of an estate. Therefore, the beneficiary or heir need not worry about any tax liability. If the beneficiary or heir lives in a state that imposes an inheritance tax, however, it must be paid by the recipient of the gift after receiving the gift or inheritance. Currently, only six states impose an inheritance tax, including:
- New Jersey
Whether you are an Executor of an estate, a beneficiary or heir, or are simply planning your own estate, the best way to determine with certainty how federal and/or state taxes will impact an estate is to consult with an experienced New Hampshire estate planning attorney.
If you have additional questions or concerns regarding federal or state gift and estate taxes, contact the experienced New Hampshire estate planning attorneys at Debruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.