How do taxes affect what you leave for your loved ones?
Ensuring that your loved ones are cared for is one of the main reasons you have a will. You want them to be comfortable after you’re gone. Of course, you also want to know that your estate is divided and cared for properly.
Knowing that your wealth and property is going to be taxed might make you anxious since you want to give those close to you as much as you can. Here are a few things to understand:
Estate tax and inheritance tax
You might be surprised to learn that estate tax and inheritance tax aren’t the same things. Estate tax is tax on everything you leave behind, and inheritance tax is tax on what each individual person or entity receives from your will.
Before any of your estates gets divided, the federal government can collect tax on 40 percent of it from estate tax, as long as it is worth over 11 million dollars. If you leave behind less than that, there is no estate tax at all.
Pennsylvania is one of the only states that has an inheritance tax. Once your will has been read and everything has been distributed to the beneficiaries, each of them will be taxed on what they received.
Whom does inheritance tax affect, and how?
Depending on your relationship to the people who are inheriting from you, what they receive will differ:
- 0 percent tax on inheritance given to your spouse or children younger than 21
- 4.5 percent tax on inheritance given to your grandparents, parents, children over 21, and their children
- 12 percent tax on inheritance given to your siblings
- 15 percent tax on inheritance given to anyone else
These tax rates could affect how you want to structure your estate, so you should keep them in mind the next time you are adjusting your will. Some rules may change the amount that is taxed based on what the item is and who receives it, but for most people, it will be as simple as how they are related to you.