ESTATE TAX VS. INHERITANCE TAX

What is the difference between estate tax and inheritance tax?

Estate tax is that owed and payable by the estate.  The federal government applies an estate tax to estates over $5.43 million for 2015 (this amount is indexed and is scheduled to increase every year).  For states that impose an estate tax (most do not, including California), the residence of the decedent determines whether or not state estate tax will apply.  Many states, like the federal government, exempt a certain portion of the decedent’s estate before levying an estate tax.

Inheritance tax is paid by the heir or beneficiary.  The residence of the heir or beneficiary will determine whether or not state inheritance tax will apply.  Half a dozen states employ an inheritance tax.  The relationship of the beneficiary to the decedent may also determine whether tax is applicable; spouses are generally exempt.  Like estate taxes, there is also usually an amount that is exempt from taxation.

Regardless of where you live, the reality for most Americans, however, is that you do not need to worry about either estate or inheritance tax.  (However, if you think this means you don’t need a trust, read our blog about the time and expense of probate administration here , non-trust estate transfers here, and protecting family wealth here.