Do I need to pay inheritance taxes?

Do you want to pay less in taxes?

Of course you do. I would be worried if you wanted to pay more in taxes...

The question is HOW you can pay less in taxes. Here's one way: estate planning.

A good estate plan can help you minimize your tax burden. Specifically, estate planning can impact (1) income taxes, (2) inheritance taxes, and (3) estate taxes.

Most people are familiar with income taxes. However, they are less familiar with estate taxes; and many people have no idea that inheritance taxes even exist. So it comes as no surprise that one of the most common questions I get from prospective clients is:

"Do I need to pay inheritance taxes?"

It is a good question and is usually accompanied by a number of other, related questions:

  • What, exactly, is an inheritance tax?
  • Is an inheritance tax the same thing as an estate tax?
  • How can I avoid having to pay an inheritance tax?

This blog post will answer these questions, give you a better understanding of the difference between inheritance taxes and estate taxes, and explain how those laws operate in Oklahoma.

Oklahoma does not have an inheritance tax.

Let's cut right to the chase: If you inherit from someone who resided in Oklahoma at the time of their death — or if you inherit real estate located in Oklahoma — you will not have to pay an inheritance tax.

But what if you inherit from someone who lived in another state? Or what if you inherit real estate located in another state?

Odds are, you still won't have to pay an inheritance tax. Only six states currently have an inheritance tax (more on this below), and there is not a separate federal inheritance tax.

And even if you inherit from someone who lived in a state with an inheritance tax, you still may not have to pay anything due to a number of exemptions.

Inheritance taxes vs. estate taxes

"Wait a minute," you may be angrily shouting at your computer while reading this. "What do you mean there's no inheritance tax?? I thought you wrote something about how I might have to pay estate taxes?!"

This is where things can get confusing.

While estate taxes and inheritance taxes are both commonly referred to as "death taxes," there is one important thing you need to understand: 

Inheritance taxes are not the same thing as estate taxes.

Both types of taxes can be imposed by the federal government and/or state governments, but there is a subtle — yet important — difference between them:

  • An estate tax is paid by the estate of a deceased individual after their death. The tax is assessed on the overall value of a decedent's estate.
  • An inheritance tax is paid by the decedent's heirs or beneficiaries after they receive their inheritance. The tax is assessed on the inheritance of each individual beneficiary.

In other words, the main difference between inheritance taxes and estate taxes is who pays them. Here's an easy way to remember who pays which tax:

If you are inheriting from someone, you should figure out whether you need to pay an inheritance tax. If you are the executor of an estate, you should figure out whether you need to pay an estate tax.

Which states have an inheritance tax?

Estate taxes are much more prevalent than inheritance taxes. While 14+ states have a separate estate tax, only 6 states have an inheritance tax.

 Estate taxes are paid by the decedent's estate; inheritance taxes are paid by the decedent's heirs.

Estate taxes are paid by the decedent's estate; inheritance taxes are paid by the decedent's heirs.

However, each of these states has certain inheritance taxes exemptions.

For instance, no state requires a surviving spouse to pay an inheritance tax. And in every state except Nebraska and Pennsylvania, direct descendants of a decedent are also not required to pay.

These exemptions are state-specific and can get confusing, especially when they interact with state or federal estate tax laws. And without careful planning and knowledge of your state tax laws, your estate or your heirs could end up paying the price.

How can I minimize inheritance and estate taxes?

Tax planning is an important part of estate planning. A good estate plan should minimize inheritance taxes and/or estate taxes for you and your heirs. If it doesn't do that, then you are not getting the most bang for your buck.

To discuss how you can use estate planning to minimize taxes for you and your heirs — or if you have questions about inheritance or probate matters — contact the Oklahoma City estate planning attorneys at Postic & Bates for a free consultation appointment.

David M. Postic is an associate attorney at Postic & Bates, P.C. His practice includes estate planning, probate, real estate, adoption, business law, and litigation.

You can email David through our Contact Us page or by calling our office at (405) 691-5080.

[As with all our posts, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]