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WILL MY HEIRS BE FORCED TO PAY AN INHERITANCE TAX?
“The taxes that can enter the picture when assets are changing hands are probably going to enter your mind when you are
engaged in your estate planning efforts. There is some confusion with regard to these taxes, so we will look at the facts as we
examine the impact of death taxes.”
JOHN POTTER CHARLOTTE NORTH CAROLINA ESTATE PLANNING ATTORNEY
Will My Heirs Be Forced to Pay an Inheritance Tax? www.potterestateplanning.com 2
The taxes that can enter the picture
when assets are changing hands are
probably going to enter your mind
when you are engaged in your estate
planning efforts. There is some
confusion with regard to these taxes,
so we will look at the facts as we
examine the impact of death taxes.
INHERITANCE TAX
An inheritance tax is a tax that is imposed on transfers to each individual
nonexempt inheritor. As a result, multiple impositions of the tax could
potentially be applied when one estate is being administered.
When you think about taxation, you have different levels. On the federal level,
there is no inheritance tax at all, but there are a handful of states in the union
that impose state-level inheritance taxes. We have offices in North Carolina and
Kentucky. Fortunately, there is no inheritance tax in the state of North Carolina.
However, as luck would have it, Kentucky is one of the six states in the union
with a state-level inheritance tax. The other five states are New Jersey,
Maryland, Nebraska, Pennsylvania, and Iowa.
The existence of the Kentucky inheritance tax is the bad news, there is also some
good news with regard to the exemptions. A surviving spouse, children, parents,
siblings, and grandparents are considered to be Class A beneficiaries. They are
completely exempt from the Kentucky inheritance tax.
Will My Heirs Be Forced to Pay an Inheritance Tax? www.potterestateplanning.com 3
Class B beneficiaries
would be the spouses of
your children, aunts and
uncles, great-
grandchildren, and
nieces and nephews. The
rate of the inheritance
tax on transfers to these
relatives would be
somewhere between four
percent and 16 percent depending on the amount that is being transferred. We
should point out the fact that the first $1000 that you transfer to any of these
relatives would be exempt.
Everyone else would be a Class C beneficiary, and the first $500 would be
exempt. The inheritance tax rate on the rest would be between six percent and 16
percent.
ESTATE TAXES
Many people assume that an inheritance tax is the same thing as an estate tax,
but this is not the case. As we have explained, an inheritance tax is applied on
each transfer to inheritors who are not exempt from the tax.
An estate tax is different. This type of tax is applied to the entire taxable portion
of an estate before it is transferred to the heirs. There is a federal estate tax, and
it carries a 40 percent maximum rate.
Will My Heirs Be Forced to Pay an Inheritance Tax? www.potterestateplanning.com 4
Every estate is not going to be
subject to the federal estate tax,
because there is a credit or
exclusion that you can use to
transfer a certain amount free of
taxation. In 2016, the amount of
this exclusion is $5.45 million. A $5
million benchmark was established
for 2011, and there have been
ongoing adjustments to account for
inflation each year since.
There is an unlimited marital federal estate tax deduction. If you are married to
an American citizen, you can transfer unlimited assets to your spouse tax-free,
but transfers to any other relative would be subject to the death tax.
The District of Columbia and 14 of the states impose state-level estate taxes.
There used to be a state-level estate tax in North Carolina, but it was repealed, so
there is no state-level estate tax to contend with if you live in North Carolina or
Kentucky.
If you own property in a state that has its own estate tax, the estate tax in that
state could be applicable, even if you are not a resident of the state.
Will My Heirs Be Forced to Pay an Inheritance Tax? www.potterestateplanning.com 5
SUMMARY
An inheritance tax and an estate tax are two different forms of taxation. There is
no inheritance tax on the federal level, but there are a handful of states that have
a state-level inheritance taxes, and Kentucky is one of them.
Most people do not pay
the federal estate tax,
because the first $5.45
million that is being
transferred is exempt.
There are some states that
impose state-level estate
taxes, but the states that
we practice in do not have
state-level estate taxes.
If your estate is subject to taxation, there are various different strategies that can
be implemented to ease the burden. The ideal course of action will depend upon
the circumstances. You can set up a consultation with a licensed estate planning
attorney if you would like to explore your options.
REFERENCES
IRS https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax Kentucky Department of Revenue http://revenue.ky.gov/individual/inherittax.htm
Will My Heirs Be Forced to Pay an Inheritance Tax? www.potterestateplanning.com 6
About the Author John Potter
John Potter is an Estate Planning and Elder Law attorney in the Ballantyne area of Charlotte, North Carolina. His practice focuses exclusively on two areas: Estate Planning, helping individuals protect their families and preserve their legacies both during their lifetimes and after their deaths, including through Wills and Living Trusts; and Elder Law and special needs planning, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, including nursing home care and other medical expenses.
Experience
After graduating from the University of Virginia School of Law in 2003, Mr. Potter clerked for United States District Judge Jennifer Coffman in Lexington, Kentucky. In 2004, he joined the law firm of Taft, Stettinius & Hollister LLP in Cincinnati, Ohio, where he practiced in the litigation section. His experience with estate and trust litigation left him with the conviction to help clients proactively take control of their affairs both to avoid unnecessary, time-consuming, expensive, and heart-breaking litigation and also to give clients the peace of mind and other benefits that come with proper planning. Mr. Potter practiced estate planning and elder law in the northern Kentucky office of his family’s law firm beginning in 2008. In 2012, Mr. Potter moved to North Carolina and opened the Charlotte office of the Potter Law Firm Office. He is admitted to practice law in North Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs. The Potter Law Firm www.potterestateplanning.com 15720 Brixham Hill Avenue, Suite 300 Charlotte, NC 28277 Phone: (704) 944-3245
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