Some people are not aware of the fact that an inheritance tax and an estate tax are two different forms of taxation. As we have stated, an inheritance tax can be applied on transfers to each individual nonexempt inheritor. An estate tax would be applied on the entire taxable portion of the estate in question before it is transferred to the heirs. Learn more about taxes in this presentation.

1. Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 1
“Some people are not aware of the fact that an inheritance tax and an estate
tax are two different forms of taxation. As we have stated, an inheritance tax
can be applied on transfers to each individual nonexempt inheritor. An estate
tax would be applied on the entire taxable portion of the estate in question
before it is transferred to the heirs.”
DO I PAY TAXES WHEN
SOME LEAVES ME
MONEY?
Unsworth Law, PLC
VERMONT ESTATE PLANNING AND ELDER LAW

2. Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 2
The news is rarely good when it comes to taxation, but there are some positives
that we can pass along with regard to taxation as it applies to the distribution of
inheritances. Let's look at some of the facts.

3. Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 3
Income Tax
If you receive an inheritance, you may naturally assume that you have to claim
the income when you file your annual income tax returns. Since the IRS requires
you to report virtually everything, this makes sense, but in reality, an inheritance
is not considered to be taxable income.
Capital Gains Tax
The capital gains tax is potentially
applicable when a gain is realized.
A gain is realized when you sell an
asset that appreciated while it
was in your possession and you
pocket the proceeds.
There are two different categories for capital gains, and they carry two different
rates. The distinction is the length of time that you maintain possession of an
appreciable asset before you realize a gain.
The dividing line is a year; long-term capital gains are gains that are realized
more than a year after the acquisition, and short-term gains are gains that are
realized less than a year after the original purchase of the asset.

4. Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 4
Since the government would like to encourage long-term investing, the capital
gains tax rate on long-term gains is lower than the rate on short-term gains. The
long-term gains rate that you would pay would depend upon your income level.
The highest income earners pay the maximum rate, which is 20 percent, but
most people pay 15 percent under currently existing laws. Short-term capital
gains are taxed at your regular income tax rate.
If you were to inherit assets that appreciated while they were in the possession
of the person who left you the inheritance, the assets would get a step-up in
basis. This means that you would not be responsible for the gains that took place
while the assets were in the possession of the decedent. For capital gains
purposes, the value of the assets would be equal to their value when you
acquired them.
The capital gains tax could be a factor for you if you realize gains from these
assets in the future.

5. Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 5
Inheritance Tax
An inheritance tax is a tax that
can be applied on individual
inheritances. There is no federal
inheritance tax, and most states
in the union do not have state-
level inheritance taxes either.
We practice in the state of
Vermont, and we do not have an
inheritance tax to contend with in our state.
For your information, Pennsylvania, Maryland, New Jersey, Kentucky, Nebraska,
and Iowa are the states that have inheritance taxes.
Estate Tax
Some people are not aware of the fact that an inheritance tax and an estate tax
are two different forms of taxation. As we have stated, an inheritance tax can
be applied on transfers to each individual non-exempt inheritor. An estate tax
would be applied on the entire taxable portion of the estate in question before it
is transferred to the heirs.

6. Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 6
On the federal level, there is a $5.45 million estate tax exclusion in 2016. The tax
is only applicable on the portion of an estate that exceeds this amount.
In Vermont, we have a state-level estate tax, and the exclusion stands at $2.75
million at the present time.
Summary
For the most part, inheritances are not going to be subject to taxation unless the
estate in question is particularly valuable. Inheritance taxes can be a factor for
people who are not particularly wealthy in a handful of states, but there is no
inheritance tax in Vermont.
However, taxation can be a very big factor for high net worth individuals that are
exposed to estate taxes. As a Vermont resident, if the value of your estate
exceeds $2.75 million, the state-level estate tax is a factor for you, and the
federal tax is applicable on transfers that exceed $5.45 million.
Fortunately, there are estate tax efficiency strategies that can be implemented to
ease the burden if you are exposed. You can discuss your unique personal
situation with a licensed estate planning attorney if you would like to devise a
wealth preservation plan.

7. Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 7
References
IRS
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax
Vermont Department of Taxes
http://tax.vermont.gov/individuals/estate-and-fiduciary-taxes

8. Do I Pay Taxes When Some Leaves Me Money? www.unsworthlaw.net 8
About the Author
Stephen A. Unsworth has over 30 years of
experience in estate planning and business law.
His misson is to provide quality estate planning
services, including assistance with Living Trusts,
Wills, Medicaid Planning, Probate, Trust
Administration, Powers of Attorney, Special
Needs Planning, and Family Limited Partnerships.
Stephen is admitted to practice law in both
Vermont and Maine. He is a member of the
Vermont Bar Association, the Chittenden County Bar Association, the American
Academy of Estate Planning Attorneys, the National Academy of Elder Law
Attorneys, and the Vermont Bar Association’s Elder Law and Probate & Trust
Sections.
Stephen has been named a “Super Lawyer” by the New England Super Lawyers
Magazine each year since its creation in 2007. This distinction – based on peer
nomination, extensive polling, and independent research – ranks him in the top
5% of lawyers in New England. He has also been named one of Vermont’s top
estate planning attorneys by Vermont Business Magazine.
Unsworth Law, PLC
www.unsworthlaw.net
Railroad Avenue Partners, Professional Building
26 Railroad Ave.
Essex Junction, VT 05452
Phone: (802) 879-7133