The loss of a loved one leaves many people emotionally drained. Imagine if on top of this they also had to worry about a huge tax bill draining their inheritance.
This is one reason informed estate planning is so important. By planning for what happens when you pass away, you will relieve your family and friends from making difficult decisions regarding things like medical bills and your funeral details and expenses. Your family will have to handle these while also grieving your loss. They will have to deal with probate and everything that comes with it, and that can be a tall order.
What is an estate tax?
The estate tax, also erroneously called an “inheritance tax” and a “death tax,” is a tax on the assets you leave your heirs. It is paid to the federal government upon receipt of money or other assets from the estate of the deceased. In other words, it comes out of your estate before it is distributed to your heirs.
There is an exempted amount that you can pass on to your heirs without being taxed. This amount of $11.19 million for 2019 changes quite often. If you think the federal government will want more of your money in the future, then you have to look at the exemption going down. The $11.19 can change. The current tax rate is between 35 percent and 55 percent for any amount above the exemption, depending on how much you have, so this can amount to a significant loss of assets for your family or other heirs.
The executor of the estate is charged with the responsibility of computing, filing, and paying any and all estate taxes that are due. This is where the difference between estate taxes and inheritance taxes matters. Though they are often confused, there is a clear difference. Estate taxes are charged to and paid by the decedent’s estate while inheritance taxes are paid by the beneficiaries of the estate on the portion of the decedent’s assets they received.
What is an inheritance tax?
There is no federal inheritance tax. States alone charge this. Only 11 states still have an inheritance tax, and Arkansas is not one of them. However, if one of your beneficiaries lives in one of those 11 states, then it could be good to incorporate protections for those taxes into your estate plan. For example, if your heir inherits property in Connecticut or New Jersey, then they will have to pay that state’s inheritance tax on the property if it rises above the amount of exemption in those states. Your estate planning attorney will help you decide this.
Likewise, 17 states exercise their own estate tax laws, so consider this in your estate plan. Most states with an estate tax base their rate on the federal estate tax. Most have an exempt amount that varies from state to state. This is one reason it is important to have an estate planning attorney helping you formulate a plan. They can access this information and incorporate it into your overall plan in a way that limits the tax consequences for everyone.
Since January 1, 2005, Arkansas has not collected a state-level estate or inheritance tax. Prior to that, Arkansas charged a “pick-up” or “sponge” tax that equaled a portion of an estate’s federal estate tax bill, but that has not been the case over the last 14 years.
Why you should still plan for “death taxes”
The fact that Arkansas has neither an inheritance tax nor an estate tax does not mean all Arkansans are exempt when it comes to tax consequences as part of an estate plan. The amount exempted from federal estate taxes is $11.19 million for 2019, but if you do not plan properly, then your family or other heirs could end up getting far less of your assets than you intended.
Remember that the exemption amount fluctuates constantly. The only exemption amount that counts is the exemption after you die.
If you are putting together an estate plan and all of your assets are located in Arkansas, then you are in good shape. You will only have to worry about federal estate taxes. However, if you have assets in one of the 11 states with an inheritance and/or the 17 states (or the District of Columbia) with an estate tax, then you might want to incorporate that into your overall estate plan.
There are other reasons you should consider incorporating tax protections into your estate plan even in Arkansas. Although Arkansas does not collect an inheritance tax or estate tax now, there is a possibility it could put one or both in place between now and the end of your life. It is also possible the exemptions for the federal estate tax could shrink at some point.
You and your Arkansas estate planning lawyer should do all you can to shield as much of your money as possible from current and potential future taxes. They can do this by helping you create trusts for almost any eventuality, or arrange for gifts to your heirs that are structured to avoid gift taxes now and estate or inheritance taxes in the future. Contact Estate Planners of Arkansas today for a free consultation.