Will my beneficiaries have to pay taxes on their inheritance?

Maybe. Effective as of the end of 2012, Congress passed the American Taxpayer Relief Act of 2012, which provides an exemption from federal estate and gift taxes on estates with assets up to a certain value. The exemption will cover estates that contain assets worth $5 million, although this amount is indexed for inflation. As a result, the exemption, indexed for inflation, is $5.43 million per person in 2015. In addition, there are deductions for most (but not all) amounts left to a surviving spouse or to charity. In determining whether your estate is worth $5.34 million, you may need to take into account assets such as life insurance payable on your death, retirement benefits, and gifts that you made during your lifetime. If your estate exceeds the available exemption and deduction amounts, then a federal estate tax of up to 40% will be assessed on the remaining amounts. 

A husband and wife each have their own $5.43 million exemption. In some cases and with proper planning, one spouse may use the exemption that his or her predeceased spouse did not use during their lifetime. (Note: this is called “portability” and means that a married couple can pass $10.86 million free of tax at this point. However, it gets very complicated if you have second marriages and such). 

West Virginia does not currently have an estate or inheritance tax. Many other states, however, do have such taxes, which are imposed in addition to the federal estate tax. You may need to pay estate or inheritance taxes in another state if you are a part-time resident of that state or if you own property located in another state. 

We would recommend that you consult with an attorney if you are concerned that your estate may be affected by the federal estate taxes, if you are worried about having to pay tax in another state, or if you have a complicated family arrangement (such as second spouses with children). 

For more information, see: 26 U.S.C. §§ 2001-2058 (2015); The American Taxpayer Relief Act of 2012, Pub. L. 112-240.