A common estate planning question is whether an inheritance is taxable or not. Fortunately, there is no tax in the United States for the person who inherits assets. However, there may be a tax owed by the estate of the deceased individual. Yes, as strange as it sounds, a deceased person can be taxed. Let’s take a closer look.
The “death tax,” more officially known as the estate tax, is a transfer tax. Meaning that it is a tax on the assets you are giving away at your passing. If you give away less than the estate tax exemption amount, there is no estate tax owed. Currently, the exemption amount is very high – $12.06 million per person. A married couple can use both spouse’s exemption amounts, so they can pass on essentially double that of a single person.
For those who pass away with over the exemption amount, the estate tax is a hefty 40% on the overage. These estates are mandated to file an estate tax return and pay the tax within 9 months of date of death to avoid penalties. Prior to the transfer of assets to the heirs, the executor or trustee must pay the estate tax or they could find themselves personally liable for it.
Currently, the exemption amount is scheduled to half in 2026 if Congress doesn’t change it before then. If your assets exceed the estate tax exemption amount, then planning is critical to avoid or greatly reduce any estate tax liability. If your estate exceeds the estate tax exemption amount, then you should see a qualified attorney who is versed in this area of law to plan accordingly.