Inheritance Tax
Also known as a death tax, many countries of the world charge a tax on any inheritances that you bequeath to your friends and family in your will. It is a tax on the value of the property or the amount of money that someone inherits. You may think that this is something that only those who are really wealthy should worry about, but it is becoming a growing concern for everyone. However, there are many things that a person can do before he/she dies to make sure that the inheritance you pass on to your loved ones does not get eaten up in taxes.
Setting up a trust is one way you can lessen the amount of inheritance tax that will be due when you die. A trust is a legal arrangement you can draw up so that you can give away some of your assets to individuals. The kind of trust you want to set up depends on the individual circumstances.
- Discretionary trust – this provides flexibility to the trustee regarding who will receive any inheritance and when.
- Maintenance trusts – these provide for minors that you name as heirs in your will.
Interest in Possession Trust – provides an income for the beneficiary during their lifetime or for a specified period of time.
There are many different reasons why individuals would want to set up a trust. It helps you to make careful decisions regarding the handling of your assets after your death and protects your family with all the legal work required in probate court. You can set guidelines about how you want the inheritances to be dispersed, but the biggest benefit is to protect your assets from the Inheritance Tax.
In the United States, an inheritance tax is required on estates that are worth over $1.5 million and in the UK on estates valued in excess of £ 275,000. The passing of an estate to a surviving spouse is exempt from the inheritance tax.
In some of the newer inheritance tax laws that have been passed in some of the states in the United States, changes have been made to reduce the amount of taxes due upon death. In Pennsylvania, for example, the property transferred to a spouse was only exempt from taxes if they had joint ownership of the property. In the changes, it is possible for one spouse to place property in trust for the husband/wife and then provide directives on how it is to be passed on to the children. Thus, the property is taxed at the time of the death of the surviving spouse – deferring the tax to the future. Of course, the husband/wife can elect to pay the taxes or choose to defer them. Many considerations have to be made before this decision should be made to reduce the overall amount of taxes.
The amount of tax you have to pay on your inheritance depends on your relationship to the deceased. Usually, a 4.5% tax is imposed on any inheritance passed on to family members and the rate increases to 10% or even 20% on inheritances passed on to friends. Transfers of inheritances between siblings are also subject to an inheritance tax of 12%, but 15% is applied to nieces and nephews. In the event of the death of a person under 21 years of age, there is no tax due on any assets that pass to the parents.
Any proceeds that you may inherit from life insurance policies and retirement plans are exempt from the inheritance tax. There are also certain clauses that you need to be aware of when you give a gift to your son or daughter. For example, if you gave your house to your child, but reserved the right to continue to live there, this property is taxed at the time of your death as being part of an inheritance.
