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

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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