This article originally appeared as a column for the Cleveland Jewish News.
There is much confusion about inheritances and the various taxes due on them. Contrary to popular belief, not every estate/inheritance will be taxable. In fact, most won’t, and it’s a common misperception – based largely on old, outdated rules – that significant portions of any inheritance will go toward tax obligations. In general, three basic types of taxes may apply to an estate.
A “gift,” for purposes of a gift tax, is anything that is given without expecting something in return. Generally, the gift giver is responsible for the taxes on a gift, although in certain circumstances the recipient may assume responsibility. For tax year 2016, a donor is entitled to give up to $14,000 per recipient per year, without incurring tax penalty. This is a per-person amount, meaning a married couple can, together, gift up to $28,000 per year per recipient ($14,000 from each spouse.)
The total lifetime exclusion amount – for individuals passing away in 2016 – is a hefty $5,450,000. Because the exclusion amount is so high, simply giving the inheritance funds away to heirs during life is a popular estate planning mechanism, not only because of tax benefits and Medicaid considerations, but also because the giver has an opportunity to see the recipient’s use and enjoyment of the gift.
The gift recipient is not required to pay separate taxes on such gifts received. Note, though, that if the gift is an asset, and not cash, other types of tax may apply, such as for appreciation of the value of a stock.
The Internal Revenue Service defines an estate tax as “a tax on your right to transfer property at your death.” Most estates will not require a federal estate tax return. The total exclusion amount has generally increased each year for the past several years to account for inflation, and, for 2016, a filing is required if the estate has total gross assets and prior taxable gifts of at least $5,450,000 in 2016.
However, a filing is required if the estate intends to transfer any “deceased spousal unused exclusion” amounts to a surviving spouse, irrespective of the total estate size. This means that a federal return may need to be filed even if no money is owed. The DSUE refers to the allowable amount of money paid out in gifts before those gifts become taxable.
Ohio’s state estate tax was repealed effective Jan. 1, 2013.
In contrast to taxes paid by the donor, an inheritance tax is paid by the recipient. These are assessed at the state level. Interestingly, most people believe they will owe an inheritance tax upon the death of a beloved family member. Currently, though, only six states assess an inheritance tax; Ohio is not one of them.
Of course, no article is an adequate substitute for professional advice. Tax considerations are an important part of your overall estate plan and, as with most tax rules, they are difficult to navigate, hard to understand, and the limits change from one year to the next. It is always a good idea to discuss your specific situation with tax and estate planning professionals to insure your heirs – and not Uncle Sam – receive the most money possible.
*Andrew Zashin writes about law for the Cleveland Jewish News. He is a co-managing partner with Zashin & Rich, with offices in Cleveland and Columbus.