When someone passes away, their entire property, assets, and personal belongings from an estate are then further processed and given to the deceased family. On the other hand, inheritance is the assets the heir received from someone else’s estate.
Understanding the concepts and their differences will help you know how they work and how you should plan for your future. We are here to help you in this process. Here are the things we will explain in this post:
- What’s an Estate?
- What Is Inheritance?
- How they differ
- Who is responsible for taxes like estate tax or inheritance tax?
Let’s get started!
What’s an Estate?
An estate is a person’s entire property, assets, and debts that they have accumulated during their lifetime. You can create an estate with proper guidelines; if you don’t, the court will handle the case using its systems.
So, how does an estate work? Once the individual dies, all their belongings are classified as assets and debts. The debts are first paid off using the assets; after that, the remaining property is given to the deceased’s family members.
There are two ways the process is handled, depending on whether the deceased has created an estate using a trustee. If the deceased has a trustee, they will handle the entire handout process. But if not, all the assets will go through a process known as probate, where all these assets are recorded, then the debts are paid, and then the beneficiaries receive the remaining assets.
Components of an Estate
- Real Estate: Properties such as houses, commercial properties, land, etc.
- Personal Property: Items like vehicles, jewellery, art, or furniture.
- Investments: All the person’s investments, such as stocks, mutual funds, gold, etc.
- Debts: Student loans, credit card loans, mortgages, etc.
Death Taxes and Estates
When it comes to taxes in an estate, the taxes are applicable after a certain threshold of the amount is crossed. As of 2024, the amount is $13.1 Million. The taxes are only applicable after the debts are paid and the transfer amount the heirs and beneficiaries will receive exceeds 13.1 Million. If the amount exceeds it, the course will deduct the taxes during the probate period.
READ MORE What’s an Estate in Legal Terms? The Importance of Probate and Asset Distribution
What Is Inheritance?
An inheritance is the assets and property the beneficiary receives from an estate. The amount and portion of the estate the beneficiary receives depends on the estate, whether it was customised or by default, where the court gets involved because the deceased didn’t set a plan.
So, there are two ways an estate inheritance plays out: Case one is when the deceased had an estate planned, and case two is when the deceased had no plans. In case one, the inheritance is pre-planned, and the amount you will receive is already given with all the other details. However, in the second case, where the deceased had no plan, the court handled all their assets through the probate process, and the beneficiary received the amount based on state laws.
Do Beneficiaries Have to Pay Taxes on Inheritance?
Under normal circumstances, the beneficiaries don’t have to pay any taxes on the amount they receive as it usually is already taxed if the amount is over $13.1 Million. But sometimes, the state requires the beneficiaries to pay taxes.
Taxes: Estate Tax vs. Inheritance Tax vs. Death Tax
Estate Tax
The estate itself pays the estate tax. If the transfer amount that the beneficiaries are to receive exceeds a threshold set by the government ($13.1 Million), only then is the estate set to pay the taxes. Although not all states have the same threshold, some states have lower tax thresholds.
Inheritance Tax
Usually, the beneficiaries don’t have to pay the taxes. Still, in some states such as Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, beneficiaries must pay taxes on their inheritance.
Death Tax
Death tax is an informal term to describe inheritance and estate tax, which means it’s not a different term; it’s just a way of saying the same thing.
Differences Between Estate and Inheritance
Ownership vs. Receipt
An estate is an individual’s personal property, assets, and debts that they have collected during their lifetime. Once the estate is processed, a certain amount after the debt and taxes are paid is given to the beneficiaries. In case of an inheritance, the beneficiaries receive the amount that comes from someone else’s estate.
Tax Responsibility
When it comes to an estate, the estate itself pays the taxes if the amount after debt exceeds $13.1 million in 2024. However, you can reduce the tax burden in many ways to reduce the transfer amount below $13.1 million.
The amount you receive for inheritance has already been processed, and the estate pays the taxes. However, some states in the U.S. still charge taxes to the beneficiaries.
READ MORE What is Estate at Will?
Frequently Asked Questions (FAQs)
What makes an estate an estate?
An estate is the wealth, property, and debt that an individual has accumulated during their lifetime. It includes all their financial assets, real estate properties, personal items like jewellery, cars, and investments.
What does it mean when you inherit an estate?
If you inherit an estate, it means that you are named as the beneficiary in the will of the deceased and will receive their money, property, or other assets from it.
Who bears the tax burden of an estate?
The estate itself is responsible for paying the taxes before distributing them to the beneficiaries.
Final Statement
Understanding what an estate and inheritance are is an important part of your future because it helps you understand how things work and how you should plan things for your future to create a secure future for your loved ones.
An estate is everything with value that you have acquired in your lifetime; these include assets, properties and debts that will be settled after your death using your acquired assets and then taxed if applicable, and then your wealth will be distributed to your loved ones. Inheritance is what the beneficiaries receive from your estate.
Now that you know what both of these concepts are, I’m sure you can make a better plan for your future knowing how everything goes.