Whether you’re having your first estate plan drafted, or you are updating an existing one, you may wonder how inheritance tax will impact your heirs after you die.
At CMP, we understand that inheritance tax rules can be confusing. One of the most common questions we hear from our clients regarding the inheritance tax is:
We’re here to help. In this post, we’ll explain what the inheritance tax is, how it works, and what the inheritance tax laws are in Utah. We’ll also give you a quick rundown of other necessary tax filings related to inheritance.
An inheritance is anything you receive from a person who has passed away. Inheritance may include money, material possessions such as jewelry or furniture, real estate, or shares of stock.
An inheritance tax is a tax paid by the person who inherits property after a loved one’s death. In other words, the tax is the responsibility of the heirs of an estate.
There is no federal inheritance tax. Inheritance taxes are always on the state level, and many states do not have an inheritance tax at all.
Inheritance taxes are levied after estate taxes are paid, and bequests and inheritances are distributed to a deceased person’s heirs. For example, if you inherited a net amount of two million dollars and you lived in a state that had an inheritance tax, you would be required to pay tax on some or all of the money you inherited.
States that have inheritance taxes specify different levels of taxation depending on an heir’s relationship to the deceased person. It’s common for spouses to be exempt from inheritance tax, while siblings may be required to pay an inheritance tax. As a rule, the closer the relationship to the deceased, the lower the amount of taxes an heir will be required to pay.
One common point of confusion regarding inheritances and taxes is a misunderstanding of the differences between the inheritance tax and the estate tax. Since both taxes relate to estates and wills, it can be bewildering to people who aren’t experts in tax law.
To clarify, an estate tax is levied against a deceased person’s estate, not against an individual. Imagine that John dies and leaves money for his daughter Jane. His estate (aka the Estate of John Doe) will be subject to an estate tax. Jane will receive her inheritance after the estate tax has been paid.
If Jane lives in a state with an inheritance tax, she may be required to pay that tax on the net amount of her inheritance after the estate tax is paid.
The second key difference is the one we have already mentioned. The estate tax is a federal tax that is collected by the Internal Revenue Service. There is no federal inheritance tax. Only a few states have an inheritance tax. The states that have an inheritance tax create the laws governing inheritances and are responsible for collecting the tax money.
Many of CMP's clients live and work in Utah. When we work with our clients and their estate attorneys drafting their wills and trust agreements or planning the structure of their estates, we are often asked, “Do you have to pay taxes on inheritances in Utah?”
The short answer is no. There is no inheritance tax in Utah. The Utah State Tax Commission says this on its website:
Federal changes phased out the national inheritance tax and, therefore, eliminated Utah’s inheritance tax after December 31, 2004. Since there is no longer a federal credit for state death taxes on the federal estate tax return, there is no longer a basis for the Utah inheritance tax.
Utah inheritance tax returns do not need to be filed. Utah does not require an Inheritance Tax Waiver.
What does this mean for you if you inherit money in Utah? You will not be required to pay a state inheritance tax. You are also not required to file an inheritance tax waiver. The estate of a deceased person may still be required to pay an estate tax at the federal level.
As of 2020, there are only a few states that have an inheritance tax. They are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Let’s close with some necessary tax filings you should know about when a loved one dies. The first is the estate tax. Congress has steadily increased the exemptions for the federal estate tax. As of 2022, the IRS requirement says:
A filing is required for estates with combined gross assets and prior taxable gifts exceeding $12,060,000 in 2022, and $12,920,000 in 2023.
If the estate of a deceased person is worth less than the above-stated amounts, there is no federal estate tax return to be filed. For estates where a filing is required, the executor must complete Form 706 to calculate the amount of estate tax that is due, or to show that no estate tax is due.
You should also be aware that depending on what you do with the assets you inherit, you may be liable for capital gains taxes when you sell the assets. As of 2020, capital gains in Utah are taxed at the regular income tax rate of 4.95%. You may also be required to pay a federal capital gains tax.
The prospect of paying an inheritance tax isn’t a happy one for most people. The good news for Utah taxpayers and heirs is that there is no inheritance tax in Utah, which means that after you pay other necessary taxes, the money and other assets you inherit will be yours to keep.
Do you need help drafting a trust agreement, a will, or planning your estate? At CMP we are not attorneys, so we do not draft any of the legal documents, but we have the expertise in working with estate attorneys to make sure documents are drafted that will minimize your tax burden and put your money to work. Estate and succession planning can be a complicated topic, but this is one road you don’t have to travel alone. CMP can help you make educated and well-informed decisions about the future of your estate and business.