Inheritance and they barely pay taxes on it.
In 2020 it is predicted that Americans will inherit $764 billion but will pay an average of just 2.1% in taxes, source msn. Even though, the estimated tax more than seven times higher, 15.8% for work income and savings interest with the idea of the more you make the higher the tax, upwards of 37%.
We all face our own immortality, and many don't plan for it. If you have assets you would like to leave for your loved ones, you need to create a plan. A last will and testament is a good start any size estate can benefit. However, assets may be subject to an inheritance tax. By law, beneficiaries are suppose to pay 40% of the wealth of an inheritance, wealthy Americans and their estates are required to pay 40% on bequests and gifts to heirs. However, there are many ways to avoid the taxes for your loved ones. A will is a good way to start to lay out how you want your estate to be handled. If there is no will, the government will take over. Although, married couples, only have to pay after the first $23.2 million. If this suits you, you're all set, but if you have other, like children, you would like to leave a share, a will is imperative. This also means the rich can funnel far more to heirs tax-free using trusts and other strategies and so can you.
Inheritance Tax vs. Estate Tax
An estate tax is levied on the value of a deceased person’s belongings, properties, and financial accounts. The executor of the estate, the person responsible for making sure that the deceased’s wishes are being followed, is responsible for making sure the estate pays these taxes.
The people receiving an inheritance from the estate are not responsible for paying estate taxes, but the tax may affect the size of the inheritance that is passed on, since tax is paid prior to dispersement.
How much of the estate is taxed is dependent on both the size of the estate and the state where the deceased resided before they passed away.
As of 2018, the federal government assesses an estate tax on all estates exceeding $11.18 million in value. If the value of an estate is less than that amount, no federal estate tax is owed.
For estates valued over $11.8, the federal estate tax works much like the income tax. The first $10,000 over the $11.18 million exclusion are taxed at 18%, the next $10,000 are taxed at 20%, and so on, until amounts in excess of $1 million over the $11.18 million exclusion are taxed at 40%.
Amount in excess of $11.18 million Taxes owed
$0 – $10,000 18%
$10,000 – $20,000 $1,800 + 20% of the amount over $10,000
$20,000 – $40,000 $3,800 + 22% of the amount over $20,000
$40,000 – $60,000 $8,200 + 24% of the amount over $40,000
$60,000 – $80,000 $13,000 + 26% of the amount over $60,000
$80,000 – $100,00 $18,200 + 28% of the amount over $80,000
$100,000 – $150,000 $23,800 + 30% of the amount over $100,000
$150,000 – $250,000 $38,800 + 32% of the amount over $150,000
$250,000 – $500,000 $70,800 + 34% of the amount over $250,000
$500,000 – $750,000 $155,800 + 36% of the amount over $500,000
$750,000 – $1 million $248,300 + 38% of the amount over $750,000
$1 million or more $345,800 + 40% of the amount over $1million
As far as the states are concerned, fifteen states and Washington D.C. levy estate taxes. Each state can set its own rates and the threshold value at which estates are taxed. For example, Massachusetts taxes any estate that surpassed $1 million in value, even though many of those estates are too small to be taxed federally.
Inheritance taxes are distinct from estate taxes because they are paid by the individuals who receive an inheritance from an estate. Once the estate has paid all relevant estate taxes and settled and financial obligations, it can pay out the remaining assets to inheritors. At this point, the inheritors must pay any relevant inheritance taxes.
While there is no federal inheritance tax, six states: Nebraska, Iowa, Kentucky, New Jersey, Pennsylvania, and Maryland implement a state inheritance tax.
This tax rate varies based on where you live and the size of the inheritance. For example, Nebraskans might pay as much as an 18% tax on inheritances. Pennsylvanians won’t pay more than 15%.
Minimizing Taxes for Your Loved Ones
There are ways to avoid estate and inheritance taxes:
One option is gifting a portion of your cash flow to your loved ones, yearly. In 2017, anyone can give another person up to $15,000 within the year and avoid paying a gift tax. Married couples who have joint ownership of property can give away up to $30,000.
As an alternative strategy and one you do not need to give up cash flow, you could set up a revocable trust. That way, you can set aside property and investments for your beneficiaries without having to be concerned with inheritance taxes.
Also a revocable trust means the assets you put in can be taken back if necessary. Also, once something is in an irrevocable trust, it remains there, safely, until you pass and everything is handed over to the heirs.
The last thing you want is to leave unnecessary taxes to your loved ones. That’s why it might be a good idea to set up trusts and estate planning as soon as possible.