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What is the Difference Between Estate Tax and Inheritance Tax?


It is easy to confuse the terms “estate tax” and “inheritance tax”. Most people do not know if these terms are synonyms or if they are actually different types of taxes. The current political discussion over “death taxes” only makes this discussion more confusing. In fact, the only similarity between estate tax and inheritance taxes is that they are both collected upon a person’s death.

The estate tax is a tax that is levied against the estate of a decedent. This tax is paid directly from the estate funds before any distribution is made to the estate’s heirs. On the other hand, an inheritance tax is a tax that is levied directly against the heir or beneficiary that receives a distribution from a decedent’s estate.

Both the federal government and State of Illinois impose an estate tax. However, neither the IRS nor Illinois levees an inheritance tax against beneficiaries who receive funds from an estate.

The states that still impose an inheritance tax upon their citizens are: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. None of these states impose an inheritance tax upon a decedent’s surviving spouse. Some states also exempt a decedent’s children from this tax. The beneficiary’s relationship to the decedent is the most important factor in determining whether that beneficiary will be subject to inheritance tax.

In states where the inheritance tax is a consideration, many estate plans include provisions which provide that the Estate pays the inheritance taxes levied against the individual. However, regardless of whether the taxes are paid by the Estate or the individual directly, the net effect is that the amount distributable to the beneficiary is reduced by the tax. Needless to say, the application of the inheritance tax is extremely complicated.

Individuals living in Illinois generally do not have to worry about inheritance tax. The issue of the inheritance tax highlights the many complexities that surround the taxation of decedents’ estates. In nearly all instances, proper planning can reduce taxes and ensure the efficient transfer of a decedent’s assets to their heirs.

Contact a Chicago Estate Planning Attorney

The estate planning lawyers at Hays Firm, LLC are knowledgeable estate attorneys who have a great deal of experience helping families to protect their assets and ensure that those assets are effectively and efficiently transfer to the next generation. Please contact us to talk about how we can help.