Do Siblings Pay Inheritance Tax? (Demystifying the Rules)

Do siblings pay inheritance tax? (Demystifying the Rules)

If you inherit money or property from a sibling in the US, you might wonder if you have to pay any taxes on it.

The answer is not so simple, as the US has a complex system of federal and state-level inheritance taxes that vary depending on several factors.

In this article, we will explain the basics of inheritance tax for siblings and how to avoid tax surprises.

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What is the Federal Inheritance Tax?

The federal government imposes a tax on the value of an estate that exceeds a certain threshold.

This is called the federal estate tax.

For 2024, the threshold is $12.92 million per person, which means that only very large estates are subject to this tax.

The tax rate ranges from 18% to 40%, depending on the amount above the threshold.

The federal estate tax applies to the estate as a whole, not to individual beneficiaries.

This means that if your sibling leaves you a portion of their estate, you do not have to pay any federal estate tax on it.

However, the estate may have to pay the tax before distributing the assets to you and other heirs.

There is also a provision called portability that allows married couples to effectively double the threshold.

This means that if one spouse dies and leaves their estate to the surviving spouse, the surviving spouse can use the unused portion of the deceased spouse’s threshold for their estate.

What are state inheritance taxes?

In addition to the federal estate tax, some states also impose their taxes on inherited assets.

These are called state inheritance taxes or state death taxes.

Unlike the federal estate tax, these taxes apply to individual beneficiaries, not to the estate as a whole.

This means that if you inherit money or property from a sibling in a state that has an inheritance tax, you may have to pay a tax on it, even if the estate itself does not owe any federal estate tax.

Currently, only six states have inheritance taxes: Maryland, New Jersey, Connecticut, Pennsylvania, Massachusetts, and Iowa.

The rules and rates vary by state, but generally, siblings are not exempt from these taxes and have to pay higher rates than spouses or children.

Here is a brief overview of each state’s inheritance tax for siblings:

Maryland

Maryland has both an estate tax and an inheritance tax.

The estate tax threshold is $6 million currently and the tax rate is 16%.

The inheritance tax exemption for siblings is $0, which means that any amount inherited by a sibling is subject to a 10% tax.

New Jersey

New Jersey also has both an estate tax and an inheritance tax.

The estate tax threshold is $5.93 million for 2024 and the tax rate ranges from 10.8% to 16%.

The inheritance tax exemption for siblings is $25,000, which means that any amount above that is subject to a tax rate of 11% to 16%.

Connecticut

Connecticut has only an estate tax, not an inheritance tax.

The estate tax threshold is $7.1 million and the tax rate ranges from 10% to 12%.

However, Connecticut also has a gift tax that applies to transfers of assets during life.

The gift tax threshold is the same as the estate tax threshold and the tax rate is the same as the estate tax rate.

This means that if your sibling gives you money or property while they are alive, they may have to pay a gift tax on it, and if they leave you money or property when they die, their estate may have to pay an estate tax on it.

Pennsylvania

Pennsylvania has only an inheritance tax, not an estate tax.

The inheritance tax exemption for siblings is $3,500, which means that any amount above that is subject to a 12% tax.

Massachusetts

Massachusetts has only an estate tax, not an inheritance tax.

The estate tax threshold is $1 million for 2024 and the tax rate ranges from 0.8% to 16%.

This means that if your sibling’s estate is worth more than $1 million, their estate may have to pay a tax on it before distributing the assets to you and other heirs.

Iowa

Iowa has only an inheritance tax, not an estate tax.

The inheritance tax exemption for siblings is $0, which means that any amount inherited by a sibling is subject to a tax rate of 5% to 15%.

For more information on each state’s inheritance tax, you can visit their official tax authority websites:

What are some other factors to consider?

Besides state taxes, some other factors might affect your tax liability as a sibling beneficiary.

These include:

  • The size and composition of the deceased’s estate. If the estate is large enough to trigger the federal estate tax, you may receive less than what your sibling intended to leave you, as the estate may have to pay a significant tax before distributing the assets. Also, if the estate consists of assets that have appreciated, such as stocks or real estate, you may have to pay capital gains tax when you sell them, unless you receive a step-up in basis, which means that your cost basis is adjusted to the fair market value at the time of inheritance.
  • Any existing trusts or tax-planning strategies. Your sibling may have created a trust or used other techniques to reduce their estate tax or protect their assets from creditors or lawsuits. Depending on the type and terms of the trust, you may receive your inheritance differently, such as in installments or with restrictions. You may also have to pay income tax on the trust distributions, depending on the source and nature of the income.
  • Debts and expenses associated with the estate. Before you receive your inheritance, the estate has to pay off any debts and expenses that the deceased owed or incurred, such as mortgages, loans, credit cards, medical bills, funeral costs, and legal fees. These may reduce the amount of assets available for distribution to you and other heirs.

How to Avoid Tax Surprises and Plan Ahead

As you can see, inheriting money or property from a sibling in the US can be a complicated and potentially costly affair.

To avoid tax surprises and plan, you should:

  • Seek professional advice. The best way to understand your tax situation and options is to consult a qualified estate planning attorney, accountant, or financial advisor. They can help you navigate the complex rules and regulations of federal and state inheritance taxes and advise you on how to minimize your tax liability and maximize your inheritance.
  • Communicate with your sibling. If possible, talk to your sibling about their estate plan and your expectations. This can help you avoid misunderstandings and conflicts later on. You can also express your wishes and preferences to your sibling, such as whether you want to receive cash or property or whether you want to donate some of your inheritance to charity.
  • Review your estate plan. If you inherit a substantial amount of money or property from a sibling, you may want to update your estate plan to reflect your new situation. You may want to revise your will, trust, beneficiary designations, or other documents to ensure that your assets are distributed according to your wishes and that your heirs are protected from unnecessary taxes and expenses.

Conclusion

Inheritance tax for siblings in the US is a complex and variable topic that depends on several factors, such as federal and state laws, the size and composition of the estate, and the existence of trusts or tax-planning strategies.

To avoid tax surprises and plans, you should seek professional advice, communicate with your sibling, and review your estate plan.

Thank you for reading this article.

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