Inheritance and Estate Tax considerations

Taxes are a massive part of our daily lives and it’s important that we plan for these after we die too.

You should keep in mind that not all debts become invalid in the event of our death. Though some, such as student loans, will be discounted.

Creating a Will to plan for the future of your estate is a fantastic way to ensure your wishes are met after death and that your loved ones are secure, but it can also help you with your current financial situation, maximizing your assets while you still have them.

Inheritance Taxes

An inheritance tax, also known as ‘death duty,’ is paid by your beneficiary after they have received the money declared in your Will. This is something to bear in mind as your family may not receive the full amount that you intended for them, as some of this will be removed in tax. This tax amount could be anything up to 40% based on the total amount that you choose to leave for them.

The taxation rate rises in percentage the more you give. So, although you might want to provide almost all your assets to a single person, this may be less beneficial than splitting it between two people in the long run, as it is the amount that each individual received that this tax is based on.

When writing a Will, assets and wealth can be divided between two people, even if they are part of the same household. For this reason, if your beneficiary lives in the U.S. and you choose to provide all of your wealth and assets to that person alone, it may be more beneficial for them for you to split the amount between them and their partner, if you are confident that this money will be shared. This reduces the amount of tax that each will pay on the inheritance and won’t affect them filing their own taxes jointly in the future when they file any tax returns.

Estate Taxes

Estate Taxes behave a little differently to Inheritance Taxes in that they are removed from the total amount of money available prior to the heir receiving it. The total amount of money in the pot determines how much tax will be paid. These taxes aren’t usually applied in the UK but can be applied overseas if you live in Japan, the U.S. or in some cases, in the Middle East.

However, federal estate tax is only really a threat for those who have a total of $12.06 million in wealth and assets as of 2022. Anyone owning less than this may avoid estate taxes, but inheritance tax will still be applied after the heir has received their share.

If you reside in a state in America that applies State Estate Taxes (the IRS website will be able to tell you if this is the case), then your assets will be subject to a percentage of tax prior to sending to your heir. The percentage is based on your taxable assets and is a sliding scale.

If you have between $0 and £10,000, the state will tax 18%. However, if you have $10,001 to $20,000 you will be taxed 20%.

The scale increases in increments of 2%. This means it might be worth considering the tax bracket and spending a little money every so often to reduce the tax that will be paid from your account before your leftover wealth is passed along.

Gift Tax

In the U.S., Hong Kong, certain Middle Eastern and Asian countries gifting money to people is still subject to ‘gift tax.’ This is a tax paid on large sums of money which are transferred prior to death. So, although this money won’t be caught under estate tax, you won’t get away with paying no tax on it altogether.

However, certain countries allow for ‘gifting’ an inheritance prior to death. This is something that you may be used to as a UK expat, as gifting assets and money up to a certain threshold is acceptable practice in the UK without incurring additional tax. Prior to making a Will, you may wish to gift some funds to a loved one for safe keeping. This is especially beneficial in countries that apply tax after death as money in bank accounts overseas can help you to escape some of these implications. UK tax laws, for example, do not impose a secondary estate tax after death, so any money in accounts left there would be available to gift to your loved ones, only being subject to an Inheritance Tax.

To meticulously plan for your future and secure the most finances for your loved ones further down the line, it’s a good idea to speak to a solicitor or specialist Will writer for advice. Always keep in mind that those we leave behind might be subject to inheritance taxes and planning ahead may mitigate possible taxation issues.