How to avoid paying inheritance tax when children inherit their parents’ property?Which states in the United States have inheritance tax? (2021 version)

The United States is a federal country. In addition to the federal tax policy, each state has its own unique tax system.

Before the American Life Insurance Guide "In 2020, which states in the United States are still levying state-level'inheritance taxes'?"In the column, we listed12 states and territories still levying state-level inheritance taxes.

Residents in these states,In addition to the federal-level inheritance tax, the state-level inheritance tax must also be considered.In addition, for the following 6 states, you also need to considerChild inheritance tax issues at the state level.

The inheritance tax rates for these six states and 2020-2021 are:

1. Iowa/Iowa  Tax rate 5%-15%
2. Kentucky Tax rate 4%-16%
3. Maryland  Tax rate 10%
4. Nebraska  Tax rate 1%-18%
5. New Jersey  Tax rate 0%-16%
6. Pennsylvania/Pennsylvania  Tax rate 4.5%-15%

What is the child inheritance tax?

Child inheritance tax is a state tax.When children inherit property from their elders, the children need to pay taxes.

This is different from inheritance tax.The inheritance tax is paid by the elders, Generally deducted from the estate, andInheritance tax is paid by the children.

For example, if the children and elders live in Maryland, after the elder dies, the elder’s inheritance will first be determined by whether it needs to pay federal estate tax, and then whether it needs to pay state estate tax. The tax is usually deducted from the total estate.The remaining part will be distributed to the beneficiary (heir).The beneficiaries declare and pay the state inheritance tax based on the amount of their inheritance.

in addition,Maryland is also the only region in the United States that has both a state-level inheritance tax and an inheritance tax.

How to reduce or avoid inheritance tax?

If you live in these states with inheritance tax, there are the following ways to reduce or avoid inheritance tax.For example, before death:

• move:Move to a state without inheritance tax, such as California, Texas, etc.
• Leave the estate to the spouse:The spouse usually has a full exemption and will not be levied on these taxes.
• Leave the inheritance to children or other close relatives:Children and close relatives also have different proportions of exemptions, which can reduce the cost of children's inheritance.The closer the relationship, the lower the tax rate,If you leave the property to someone who doesn't have any family ties to inherit, then those who inherit will pay higher fees.
• Set up an irrevocable trust and set the heir as the beneficiary:An irrevocable trust is an independent legal entity. After its establishment, it needs to transfer the property in its own name to thisTrustin.The advantage is that these assets will be subtracted from your total assets.The disadvantage is that you no longer have control over this part of the property.
• Set aside a life insurance claim payment to hedge:Life insurance claims, for the beneficiary (heir),Is income tax exempt, The beneficiary can use the money to pay inheritance tax.
• Send out the inheritance in advance:Both the federal and state levels allow you to give away a sum of money each year.Therefore, a planned gift to the heir before his death is also a feasible way to reduce or waive this fee.

Article summary

When considering inheritance taxes, don't forget that these are issues that need to be met only after assets reach a basic scale.Usually this property is at least $100 million or more, According to TurboTax’s statistics¹, Only about 2% of taxpayers will face this problem.

When you consider the further arrangement of the property, more often, you need to follow your own property situation to what we advocate "LBYB - Learn Before You Buy"Concept is the principle, make a preliminary judgment and choice.

In this process, we can seek the assistance of professionals in various fields, compare and judge different service plan frameworks, use professional plans in each sub-field, and finally integrate and organize into a wealth inheritance plan that can achieve the goal. (Finish)

(>>>Recommended reading:U.S. estate tax statistics｜How many U.S. families paid estate tax in 2020?)

appendix
01. "What Are Inheritance Taxes?", Tax Year 2020, TurboTax, https://turbotax.intuit.com/tax-tips/estates/what-are-inheritance-taxes/L93IUc3sC