Many worry about the tax implications on their estate and on their loved ones after they pass. Generally speaking, when a person dies, there are three taxes that can come into play:
- Inheritance taxes are those taxes charged on the person who inherits assets from the deceased. Inheritance tax is paid by the beneficiary through an inheritance tax return.
- Estate taxes are those taxes charged on the estate of the deceased prior to being transferred out of the estate. Estate tax is paid by the estate and before any assets are passed to the beneficiaries.
- Individual taxes for the deceased. Part of a personal representative’s responsibility in Colorado is to prepare and file the deceased’s final year of taxes. If an individual dies still owing taxes, it is the personal representative’s responsibility to pay those taxes from the estate before any distributions are made.
Inheritance and Estate taxes differ from state to state. The state where the property is held (not where the beneficiary lives) controls what state’s tax law is followed.
Federal Inheritance Tax
As of 2022, there is no federal inheritance tax.
Colorado State Inheritance Tax
As of 2022, Colorado has no state inheritance tax. In fact, only six states currently levy an inheritance tax; Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The rates of inheritance taxes vary from each state and on the relationship between the beneficiary and deceased.
Federal Estate Tax
As of 2022, the Federal estate tax rate depends upon the fair market value of the estate. The fair market value is calculated by taking the value of the estate minus certain deductions like mortgages, debts, and any asset that transfer to a surviving spouse or qualifying charity.
As of 2022, the first $12.06 million of an estate is exempt from taxation. Family-owned farms also receive an additional exemption amount. Depending on the remaining value of the estate (after the exempt amount), the estate is taxed at a rate between 18% – 40%.
Colorado State Estate Tax
As of 2022, Colorado does not have a state estate tax. Only twelve states and Washington D.C. levy their own state estate tax.
Having an estate plan created by an experienced attorney can lessen inheritance and estate tax implications. Early planning can help avoid disastrous tax consequences. At Burnham Law, we help our clients with individualized estate plans that use many vehicles to lower or even outright remove inheritance and estate taxes.
At Burnham Law, we also specialize in probate administration for Colorado and Wyoming. While taxes are difficult to curb with improper estate planning, the litigation experts and team at Burnham Law are experienced with handling all aspects of probate administration and are used to finding creative solutions to minimize estate tax liability as much as possible.