When you mention estate planning to most people who know anything about it, there are two thoughts that usually cross their minds: death, and taxes. Both are understandable. Death is, after all, the main reason why most people pursue estate planning. We will all eventually die, and it is incumbent upon each of us to have a plan that deals with important death-related concerns like who gets our assets when we’re gone.
Taxes are also a concern, especially with discussions of the estate tax being so prominent in the nation’s political debate at the national level. But what about the inheritance tax? What role does that play in any discussion of estate planning? To find out, you need to get the facts about the inheritance tax in Michigan.
What is the Estate Tax?
The inheritance tax is one of two main types of taxes impacting estates when people die. The main tax that most people know about is, of course, the estate tax. At the federal level, arguments about the estate tax have been raging for some time now, with some calling it a “death tax” while others refer to it as a necessary source of revenue that the nation simply cannot do without. The truth is that neither side is entirely accurate in its assessment.
Estate taxes are not really death taxes, since there is no automatic tax levied just because someone dies. Neither are they big revenue-generators as some claim, since they really only affect a tiny portion of estates each year (the tax currently only impacts estates valued at more than $5.45 million – less than one percent of all estates annually). Instead, the estate tax is a tax on the transfer of wealth. In other words, it only impacts your estate if you have a certain level of wealth.
What is the Inheritance Tax?
The inheritance tax is a tax on gifts made to beneficiaries by an estate. It differs from the estate tax in that it is assessed against only that portion of the estate that has been left to you in a bequest – and even then, it is only levied against certain classes of beneficiaries. Despite that distinction, it is still often confused with the estate tax, and many people use the two terms interchangeably.
Does Michigan Have an Inheritance Tax?
Michigan has neither an estate tax nor an inheritance tax. At one time, the state used a common tax system known as the “pick up” tax, which saw the state claim a portion of what the federal estate tax levied against decedent estates. That tax was made possible by a provision in federal law that provided a federal credit for estate taxes at the state level. When Congress altered the federal estate tax, it did away with that credit, which left Michigan and many other states with no system for collecting the tax. As a result, the state does not collect either tax.
Is there any Reason to Be Concerned About Inheritance Tax?
At first glance, Michigan residents would seem to have no worries about the inheritance tax. After all, the state doesn’t collect any taxes on estates or on the bequests left to heirs. In some instances, however, the inheritance tax can still be a major concern for people in Michigan. Granted, it’s never a concern for assets located in Michigan, but when a decedent dies with money or property in one of the six states that currently levy inheritance taxes, it can become an issue very quickly.
Here’s the problem that you could encounter: six states still have inheritance laws on their books. Those states include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. All six have laws that empower tax officials to assess inheritance tax on any bequest of property located inside the state. If you have a loved one die while owning property in one of those six states, the person to whom that property is gifted could end up being subject to a tax.
The laws governing which properties can be taxed, and which classes of heirs can be considered exempt are sometimes difficult to understand. What is easy to understand, however, is that when inheritance assets are in states with the estate tax, then there is a possibility that the recipient of that inheritance could be subject to the inheritance tax. An experienced estate planning attorney can help you to gain more insight into how those laws might apply in your situation.
What Can I Do to Avoid Inheritance Tax?
Once a decedent has passed away, it is usually too late to avoid any valid inheritance taxes that could be in play. That does not mean, however, that there aren’t ways to limit those taxes prior to death. If you have a loved one who plans to leave you property that is in an inheritance tax-collecting state, it can be possible to execute that asset transfer while he or she is still alive. Estate planning attorneys have strategies that can accomplish that goal and minimize your potential tax exposure.
Can an Attorney Help with the Inheritance Tax?
Estate planning attorneys specialize in tax planning strategies that are designed to minimize tax obligations. For individuals and families who have concerns about estate taxes or inheritance tax issues, it is always wise to consult with an attorney to develop a plan to manage any potential tax liabilities. Ideally, these strategies should be part of a broader comprehensive estate plan that addresses every important end-of-life and legacy planning concern.
At Biddinger & Estelle, PC, our estate planning and tax experts can help you to better understand how these tax issues might impact you and your heirs. Though there is no inheritance tax in Michigan, that tax can still impact the lives of residents in the state. You need to be aware of that potential impact during your own estate planning efforts to ensure that your strategy can deal with its implications. To learn more about how a Michigan estate planning attorney can help you, contact us at our website or call us today at (989) 872-5601 to