Both estate taxes and inheritance taxes have several varying factors, including estate size as well as laws varying by state, that can result in additional considerations that need to be taken. While discussions with your financial and/or estate planner regarding estate inheritance taxyour estate and your plans for disbursement continues to be of importance, we’ll take a look at the difference between an estate tax and an inheritance tax as well as a few strategies to increase awareness of the two and understand some of the possible impact of these taxes.

The difference between inheritance and estate taxes

Sometimes the terms “inheritance tax” and “estate tax” are used interchangeably; the two types of tax hold their own distinctions and should not be confused with one another. The Internal Revenue service describes the estate tax as the taxation of a decedent’s net value of property owned. Federal estate taxes are paid out of the estate’s assets, not by the recipient of an estate’s property. There are also states that collect estate taxes, including Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia.

An inheritance tax is a tax paid by the recipient of a decedent’s property. While inheritance taxes are not imposed at the federal level, there are a handful of states that collect an inheritance tax from recipients including Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Iowa.

While it’s not possible for everyone to completely avoid estate taxes or inheritance taxes, there are a few general considerations to be aware of in order to better understand their potential complexities.

Stay on top of evolving laws and exemptions

New England Investment and Retirement Operations Manager Danielle Place recently illustrated items to be aware of this year for financial and estate planning. She explained that the federal estate tax exemption rose $40,000 in 2017 to $5.49 million and many people do not need to be concerned about an inheritance tax. However, Danielle added that there are several states, including Massachusetts, that collect state estate taxes with lower exemption levels and varying tax rates.

It’s worth noting that spouses are exempt from inheritance taxes in the six states that collect it. The states that collect inheritance tax exclude life insurance payouts, although life insurance policies are often hit by estate taxes. Some states exempt recipients who are direct family members of the decedent, but not all.

Be mindful of what your estate is worth

It’s commonly assumed that only those with estates in the multi-millions should worry about estate taxes. A 2015 report from the Joint Committee on Taxation estimates that the federal estate tax affects just about 0.2 percent of the population. However, no matter the size of your estate, it’s beneficial to be aware of any and all possessions that can be considered assets. These possessions- bank accounts, real estate, collectibles, vehicles, and more- can really add up in value, so it’s important to regularly identify and review all the assets you’re holding.

Understanding whether your estate is subject to taxation under federal and state guidelines and knowing what your estate is worth are two vital things that will help you move forward in your financial and estate planning goals. At New England Investment and Retirement Group, we recommend consistent and extensive dialogue with trusted financial and estate planning professionals who can help you create a strategy that is developed around your unique circumstances.