The subject of taxation on inheritances can be a bit confusing. There are federal taxes, and you hear about state-level taxes. In this post, we will explain how an out-of-state tax can affect a resident of Oklahoma.
Inheritance Tax
An inheritance tax and an estate tax are two different types of taxes that can be levied when someone dies. Here we will look at the inheritance tax first. This tax can be imposed on transfers to each individual inheritor when one’s estate is being administered.
There is no federal inheritance tax, but there are a total of six states in the union that have state-level inheritance taxes. These six states are Nebraska, Iowa, Kentucky, New Jersey, Pennsylvania, and Maryland.
That’s the bad news, but the good news is that close relatives like children, spouses, parents, and grandchildren are typically exempt.
Horseracing is a big part of the culture here in Oklahoma, with an emphasis on quarter horses. Some people in the business also work with thoroughbreds, and Kentucky is the epicenter of that universe.
Let’s say that your uncle leaves you a thoroughbred horse farm in Kentucky. In that state, you would not be an exempt relative. Even though Oklahoma eliminated its inheritance tax in 2010, the Kentucky inheritance tax would be applicable on the transfer.
State-Level Estate Taxes
Unlike an inheritance tax, an estate tax is levied on the entire taxable portion of an estate before it is transferred to the heirs, so there would be just one instance of taxation. The reason why we use the qualifier “taxable portion” is because there is an exclusion. In other words, an amount up to which assets can be transferred without incurring the tax.
Said another way, this is the amount that can be transferred tax-free before the tax would be imposed on amounts above the exclusion or exemption amount. The exclusions vary state-by-state, and the lowest one is the $1 million exclusion that they have in Oregon and Massachusetts. New York has the highest at $5.93 million in 2021.
If you own property in a state that has an estate tax, it would be applicable if its value exceeds the exclusion in that state.
There are 12 states with estate taxes, and there is an estate tax in Washington D.C. The only one that has a gift tax is Connecticut, so if you intend to leave valuable out-of-state property to someone, you may want to consider making a gift of that asset while you are alive.
Federal Estate Tax
In addition to state-based inheritance and estate taxes, we have a federal estate tax in the United States. A person could be exposed to both a federal and a state-level estate tax. In Maryland, there is a state estate tax and a state inheritance tax, so high net worth individuals in that state are barraged from three different directions.
Fortunately, you probably don’t have to worry about the federal tax because today it carries an $11.7 million exclusion. Transfers between spouses are not subject to taxation and with a proper tax filing, a surviving spouse can use their deceased spouse’s unused exclusion. Thus, a married couple can transfer up to just over $23 million and pay no federal estate tax. Today. However, this law sunsets on January 1, 2026. At that point, the exclusion reverts back to $5 million, adjusted for inflation.
The federal estate tax exclusion is unified with the gift tax exclusion. That means you can’t give large gifts to avoid transfer taxes. The Treasury Department has issued a statement that during this awkward period when the exclusion is going to revert to a lower amount, there will be no “clawback” of lifetime gifts into the taxable estate. That policy is a gift indeed, one that should not be ignored.
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If you want to take your understanding of the estate planning and estate tax planning process to the next level, download our carefully prepared worksheet. It is a free resource, and you can visit our worksheet access page to get a copy.
Need Help Now?
At some point, you will have learned enough to know that you should work with an estate planning attorney to put a plan in place. If that time is now, we are here to help.
We know that some people procrastinate because it’s hard to discuss personal matters with someone you have just met. This is understandable, but when you work with our firm, you can rest assured that you will feel perfectly comfortable from the start.
You can schedule a consultation appointment in Oklahoma City if you call us at 405-843-6100, and you can use our contact page if you would prefer to send us a message.
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