There are three general types of tax:
- Estate tax is a tax imposed on the value of the estate of a deceased person before distribution to the heirs
- Inheritance tax is a tax imposed on a person who inherits property or money
- Gift tax is a tax imposed on the transfer of money or property to another person while getting nothing or less than full value in return
Will I have to pay estate, inheritance, or gift tax?
Fortunately, for most individuals the answer is “no”. At the state level, Michigan has never imposed a gift tax, and no longer imposes an estate tax or inheritance tax (except for Michigan residents dying before October 1, 1993). At the federal level, there has never been an inheritance tax, but estate and gift taxes may apply in certain situations to the transfer of assets by gift (during lifetime) or bequest (after death), resulting in a tax of about 40% on the value of property transferred.
Are there any exemptions available?
Yes, a significant federal estate tax exemption of $11.4 million per individual or $22.8 million per married couple (adjusted annually for inflation) applies that shelters most individuals from any tax liability. This exemption is set by Congress and may vary from year to year but has generally increased steadily since 1997. For federal gift tax purposes, another exemption applies, which generally allows a person to make as many gifts of up to $15,000 per year per individual recipient as he/she wishes, without treating the transfers as taxable gifts (thereby preserving his/her $11.4 million exemption for other purposes).
How do these taxes differ from income taxes?
Inheritance, estate, and gift taxes should not be confused with income taxes that any given estate, trust, or beneficiary may need to pay. While inheritance, estate, and gift taxes are generally not applicable for many individuals, distributions from qualified retirement plans, including most IRAs and 401Ks, will generally be subject to income tax on the recipient’s tax returns for the years in which they are paid. Thus, it is important to consider how these distributions will be taxed to defer the onset of income taxation as long as possible, if desired.
Do I have to file tax returns?
Generally speaking, the deceased person’s final state and federal income tax returns will need to be prepared/filed for the year in which death occurred. A notice should be filed to notify the IRS of the proper person to receive any communication about any prior tax debts and unfiled tax returns. State and federal tax returns will also be required for the deceased person’s probate estate (if opened after his/her death), and for any trust established by him/her in the nature of the typical “living” trust for estate planning purposes. The personal representative of any estate, trustee of any trust, and recipients of any other assets of the deceased person are generally required to file any needed income tax returns.