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Do I need to worry about estate or inheritance taxes?

Colorado state tax laws requiring estate or inheritance tax are pretty simple. There is no estate or inheritance tax collected by the state. However, Colorado residents still need to understand federal estate tax laws.

When it comes to federal tax law, unless an estate is worth more than $5,450,000, no estate tax is collected. This is per IRS’s basic exemption of $5 million indexed for inflation in 2017.

The IRS also does not collect an inheritance tax because property that is inherited falls out of the realm of “ordinary income.” This, however, does not apply to retirement accounts. Because the money was tax exempt when contributed, it is subject to taxes when withdrawn.

There is one caveat regarding inheritance tax that Colorado benefactors should be aware of. If you are inheriting property or assets from a different state, the tax laws will be based on the location of the decedent’s estate, not where you, the heir, live. While most states do not charge an inheritance tax, there are a few states that do. These states are Iowa, Kentucky, Nebraska, New Jersey and Pennsylvania.

The inheritance tax for these states is based on the property or asset value and your relationship to the deceased person. A surviving spouse is exempt even in these states, and low value inheritances are usually exempt as well. You will need your attorney to advise you of the laws of the state in question.

It is said that only an estimated two out of every 1,000 estates pay any form of estate taxes to the IRS. Is that because there are so few estates worth more than the exemption amount of $5 million plus, or is it because of careful planning by those who own wealthy estates?

There are ways to avoid paying estate taxes even on large estates. An estate planning attorney can help you identify the different tools that can be used to do so. An irrevocable trust is one such tool. If you are unfamiliar with trusts, be sure to ask your legal representative about how this tool can be used to protect assets.

Source: Legal Consumer, “Does Colorado Collect Estate or Inheritance Tax?,” accessed Jan. 22, 2018