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The Difference between Estate Tax and Inheritance Tax

The CEO and owner of Noble Financial Group in North Andover, Massachusetts, Lucas Noble is a Certified Financial Planner, Special Care Planner, and Chartered Financial Consultant. With more than 10 years of experience in the financial services field, Lucas “Luke” Noble has a firm grasp of many topics relating to financial planning and estate planning. This includes estate tax, which is different from inheritance tax.

Estate taxes are calculated according to the net value of the entire estate of a person who has passed on, and the estate pays the appropriate taxes, rather than the individual beneficiaries. This tax is collected by the federal government and is applicable to estates that are valued at $11.58 million or more, as of 2020. Due to this high threshold, many estates are not required to pay a federal estate tax. Several state governments also collect an estate tax and still have estate tax laws in place. However, most states repealed their estate tax after amendments to the federal tax law were made in 2001.

Compared to an estate tax, inheritance taxes are not required by the federal government. Only six states collect inheritance tax, including Kentucky and Nebraska. With inheritance tax, each beneficiary is responsible for paying taxes on their portion of the inheritance. As such, beneficiaries can pay varying amounts even if they all receive a piece of a single estate.

Turning Your Estate Plan into a Legacy Plan

A financial services executive in North Andover, Massachusetts, Lucas Noble leads Noble Financial Group, LLC, as its owner and CEO. As such, he provides comprehensive fee-based estate and financial planning services to businesses and individuals. Possessing upwards of a decade of financial services experience, Lucas “Luke” Noble of North Andover is familiar with estate planning and legacy planning.

A traditional estate plan can help you avoid estate taxes and protect your assets from creditors. These benefits, among others, may have enticed you to establish such a plan, which would include a last will and testament, revocable trust, living will, and healthcare proxy. However, having an estate plan isn’t always enough. In fact, 70 percent of high-net-worth families lose their wealth by the second generation. To prevent this, you may want to consider setting up a legacy plan.

Fortunately, establishing a legacy plan doesn’t mean that you wasted your time setting up an estate plan. Legacy planning is more ambitious and requires that you select a legacy team comprised of professionals with varying technical expertise -- such as attorneys, accountants, and wealth advisors- - to create a plan that suits your needs and family dynamics.

Beyond this, you must shift to a legacy mindset. Your estate plan serves as a blueprint for your success. You want to understand what you have already established and review your estate plan to determine the point from where you’re starting. You can then lay out your plan for how your assets will be handled after you pass.