Inheritance taxes can be particularly frustrating to deal with. Fortunately, there are certain ways to minimize or even avoid paying these taxes altogether. Setting up a trust is one of the most common and effective ways to reduce inheritance taxes. Keep reading to learn how.
What Is Inheritance Tax and When Does it Apply?
An Inheritance tax is a state tax that is paid when you receive money or property from a deceased person. Unlike federal estate taxes which are paid by the deceased person's estate before distributions are made, the beneficiary of the money or property is responsible for paying an inheritance tax.
As of 2021, only six states impose an inheritance tax:
- New Jersey
Inheritance taxes vary from state to state and fluctuate from year to year, though they typically only apply to assets that exceed a certain threshold, such as those that are larger than $1 million. For this reason, only about 2% of taxpayers will ever encounter this tax. For those that do have to pay an inheritance tax, however, the cost can be as low as 1% or as high as 20% of the value of the property or cash inherited.
How a Trust Can Help Reduce Inheritance Taxes
It may be wise to suggest that your family members develop a trust to handle their assets if you’re expecting an inheritance. A trust can be helpful because it allows the grantor to transfer assets to beneficiaries after passing without having to deal with the probate court.
Probate court can be expensive and time-consuming, so avoiding this process is a serious advantage. While trusts are comparable to wills, trusts typically bypass state probate mandates and the costs connected to them.
An Irrevocable Trust vs. A Revocable Trust
- An irrevocable trust will typically tie up the assets until the grantor dies. Irrevocable trusts allow you to pass assets to a beneficiary without inheritance tax, though this money may still be subject to the estate and gift tax.
- A revocable trust allows the grantor to remove the assets from the trust if necessary. Revocable trusts allow assets to transfer after death without probate, though they do not offer any benefits when it comes to avoiding inheritance tax.
Joining Assets is Not a Good Decision
While it may seem like a good idea for your family member to put their assets into joint names with you in order to pass them onto you without paying taxes, doing this can actually increase the amount of taxes you’ll owe.
When your family member dies, you’ll inherit the assets as a joint holder, but you’ll also inherit the basis. The basis is used to determine the asset’s taxable gain in value over time.
For assets that are held for a long period of time, this can mean that you’ll have to pay a high rate of taxes when you sell the assets.
Contact a Pennsylvania Financial Professional
Dealing with end-of-life assets can be a confusing and complex process if not handled properly. Our professionals here at Legacy Enhancement Trust are highly skilled in financial planning matters and have helped many other people just like you with their financial goals. Let us help you with yours, too. Don’t hesitate to contact our office with your questions right away.
Call Legacy Enhancement Trust today at (888) 988-5503 or get in touch with us online to learn how we may assist you!