Colloquially known as death taxes, estate and inheritance taxes are a tax on your right to transfer property and your right to receive wealth. When creating an estate plan, planning for taxes is an important step as the potential costs can be significant.
Tax calculations and deductions
The federal estate tax is an accounting of all your assets at the time of your death, including property, cash and securities and business interests. Although everyone is subject to federal estate taxes, only estates over the exemption value must pay the estate taxes.
To appraise the estate, the IRS the fair market value which is not necessarily the original cost of the property. Rather, fair market value is the cost a willing buyer would pay to buy the property from a willing seller.
The IRS calculates taxes based on the net value of the estate, which is the gross value minus deductions. Eligible deductions include:
- Martial deductions for property passed to a surviving spouse
- Charitable deductions for property donated to a qualifying charity
- Mortgages and debt
- Estate administration expenses
- Losses that occur during estate administration
Unlike other states, Kentucky does not have a state-level estate tax. However, funds or property received by your heirs could be subject to Kentucky’s inheritance tax. The taxation amount depends on the relationship between the beneficiary and the decedent and the value of the property. If the beneficiary pays the inheritance task in full within nine months of the deceased’s death, the state allows a five percent discount.
Tax strategies vary and what is appropriate for one estate may not work well for another. An estate planning attorney can help you review your estate and help you protect your assets when making designations.