By Steven Rogé, MBA, CFP®, AIF®
Chief Investment Officer and CEO
In taxation, inheritance and estate taxes are often used interchangeably, leading to confusion among individuals navigating the complex landscape of wealth transfer. However, these two forms of taxation serve distinct purposes and are governed by different rules and regulations. Let’s delve into the key differences between inheritance and estate taxes, shed light on their unique characteristics, and explore some facts about specific state rules.
Inheritance Taxes:
- Are imposed on the beneficiaries who inherit assets from someone who has passed away.
- Target the recipients based on their relationship to the deceased. Tax rates may vary depending on the beneficiary’s familial connection, with closer relatives often enjoying lower or exempted rates.
- Only six states in the U.S., including Connecticut, Iowa, Kentucky, Maryland, Nebraska, and Pennsylvania, impose inheritance taxes. Each of these states has its own unique set of rules and exemptions. For example, Maryland imposes inheritance taxes on assets transferred to anyone other than a spouse, child, grandchild, parent, or sibling. On the other hand, Pennsylvania offers a more expansive list of exemptions, including transfers to surviving spouses, parents, and lineal descendants.
Estate Taxes:
- Are applied to the entire estate of a deceased individual before the assets are distributed to heirs.
- The federal government imposes a federal estate tax, and some states also have their own taxes. The thresholds for federal estate taxes are relatively high, meaning that only estates with a significant value are subject to taxation.
- Most states do not impose their own taxes; however, some states have a unique twist known as “decoupling,” where they may have their estate tax with different thresholds and rates compared to the federal system. One example is Oregon, which has its estate tax but allows for a deduction for qualified family-owned businesses and farms. This deduction alleviates the tax burden on family businesses and agricultural enterprises.
Understanding the differences between inheritance and estate taxes unlocks the doors to strategic estate planning. With the ever-evolving landscape of tax laws, it’s vital to stay informed and seek guidance from seasoned professionals. Consult with a qualified tax professional or legal advisor so you can ensure compliance with applicable regulations. Take charge of your financial future, assemble your financial dream team, and embark on the journey to safeguarding your legacy for generations to come.
If you have questions regarding inheritance and estate taxes, contact our team of CERTIFIED FINANCIAL PLANNERTM (CFP®) professionals at 631.218.0077 or at info@rwroge.com and schedule a complimentary discovery call.
R.W. Rogé & Company, Inc. is an independent, fee-only financial planning and investment management firm serving clients locally and virtually across the country, with Long Island, New York, Beverly, Massachusetts, and Naples, Florida office locations. R.W. Rogé & Company, Inc. was founded on a “client first” culture and proudly commits to acting in your best interest as a fiduciary. We help clients Plan, Achieve, and Live® the life they want since 1986. To learn more about how we do this, click here.
The Author used elements of OpenAI to aid in creating this article: OpenAI. (2024). ChatGPT (3.5) [Large language model]. https://chat.openai.com
