Strategies for How to Avoid Inheritance Taxes

Strategies for How to Avoid Inheritance Taxes

Ben Geier, CEPF®  Thu, September 16, 2021

How to Avoid Inheritance Taxes

When a loved one dies, there are a lot of things to worry about, from planning the funeral to dealing with your own emotions. As is often the case though, money is a major part of the calculus of life when dealing with a recently deceased family member.

When they pass, your family will have to deal with their money, assets and debts. And if they have a large enough estate, you’ll potentially have to worry about the estate and inheritance taxes. There are things you can do now, though, that will limit the amount of money ultimately subject to these taxes, so that your family can use more of your wealth to build their own lives. For help with the estate tax or any other financial planning issues, consider working with a financial advisor.

Understanding the Differences Between Estate Taxes & Inheritance Taxes

First things first, make sure you know the difference between the estate tax and the inheritance tax. The estate tax, sometimes called the “death tax,” is money taken by the government from the estate of a recently deceased person before it’s passed on to their family, friends and other beneficiaries. There is a federal estate tax, while a number of states also levy their own estate tax.

The inheritance tax, meanwhile, is levied on money after it has passed on to an heir. Money can be subject to both inheritance and estate taxes. There is no federal inheritance tax, but a number of states levy inheritance taxes.

The rules for these inheritance taxes vary from state to state. Sometimes the inheritance tax only applies based on the state the heir lives in, though it can also matter what state the person who died was living in as well. Even what state the property, like a house for example, you inherit is in can affect the situation.

There are plenty of strategies to decrease both types of taxes.

Inheritance Tax Avoidance Strategies

If you think you’ll be getting an inheritance when a loved one dies, the first thing you should do is check the laws in both the state you live in and the state they live in. If neither of them levy an inheritance tax, you’re in the clear. Whenever your loved one dies, there will be nothing for you to worry about. There may be an estate tax to deal with, but you’ll pay nothing on any money you actually receive.

If there is an inheritance tax to consider, though, there are some things you can do to decrease your tax burden. Keep in mind that some of these steps will require advance planning and cooperation with the person leaving you the inheritance. So if you believe you’ll be getting an inheritance, think ahead and talk with your family member about the most efficient way to transfer money.

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