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According to the CDC, almost 3.4 million Americans die every year. When they do, at least some of them will leave money, houses, and other personal possessions behind for their loved ones.
If someone that you know dies and leaves something behind for you, there is a chance that you might be subjected to paying taxes on it. More specifically, you might get hit with either an estate tax or an inheritance tax.
So, what is the difference between an estate tax vs inheritance tax? We’re going to break it down for you today in our estate tax and inheritance tax guide.
Check it out below.
What Is Estate Tax?
An estate is a collection of things that a person leaves behind to whoever they want at the time of their death. They name an executor for this estate, and that person is in charge of overseeing the estate and possibly dishing out things from it to a person’s loved ones.
Before they can do this, though, there will be an estate tax that the executor must pay. They will need to file a single tax return for the estate and pay taxes based on the estate’s value.
What Is Inheritance Tax?
An inheritance is a little bit different from an estate in that it’s often the individual items that would normally make up an estate that a person has left behind for their loved ones. In this case, people won’t be required to pay any federal taxes on these items unless they decide to sell them and turn a profit.
And if they are required to pay an inheritance tax, it will be up to individual beneficiaries to get them squared away as opposed to an executor. It can make things slightly more complicated if inheritance taxes are owed.
What’s the Difference Between Estate Tax vs Inheritance Tax?
The biggest difference between estate tax vs inheritance tax is who will be responsible for paying these taxes. An executor will have to pay the tax on behalf of an estate, while individual beneficiaries will have to pay the tax on any inheritances that a person leaves behind.
If you’re creating a will and deciding how to leave your money and possessions behind, you should speak with a wealth transfer specialist about doing it. They’ll be able to come up with a great solution for you based on your specific situation.
Make Sure You Take Care of an Estate or Inheritance Tax
In theory, someone leaving behind money, homes, and other personal possessions to their loved ones should be a good thing. But it can get complicated if their loved ones don’t understand that they may need to pay taxes on them.
You should be sure you have a good understanding of estate tax vs inheritance tax. It’ll help you make the right moves if you ever inherit anything.
Get more useful financial advice by reading some of the other articles published on our blog.