Arkansas Estate Tax: 5 ‘Little-Known’ IRS Strategies [+ Pitfalls to Avoid]

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Paul Sundin, CPA

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Arkansas is one of the states that don`t impose the inheritance tax on its residents and their estate. However, living in Arkansas, you still have to plan your estate carefully and prepare it for possible federal taxation.

In this article, we shall explain when an Arkansas resident has to deal with tax due to inheriting a property and how to legally reduce the taxable part of your estate in the Natural State.

What taxes does an Arkansas resident have to pay to become an heir?

Technically, there are at least 2 cases when an Arkansas residents may have to face some fiscal burden when they inherit a property:

  • The estate is located in one of the states that still have a local inheritance tax. Those are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania;
  • The estate exceeds the Federal Estate Tax exclusion rate of $12,06 million.

Although Arkansas has neither inheritance nor estate taxes on the state level, the Federal Taxation is relevant for residents and properties located all over the United States.

The Federal Estate Tax is imposed on the property of the recently deceased person before it is transferred to heirs. If the estate exceeds the $12,06 million exemption bar, the Federal Estate Tax that can reach up to 40% may significantly reduce your inheritance.

Trust tax issues

The Estate Tax is a federal law imposed on the estate of a deceased individual. Many states also impose estate taxes. While there are certain limitations on the value of an estate before it is subject to taxation, many people opt to avoid paying the Estate Tax. Here are three examples of taxable estates:

A trust may not be subject to the Estate Tax if the assets in the trust are not included in the grantor’s taxable estate. Generally, the Internal Revenue Code sets out what constitutes a deceased person’s gross taxable estate.

The rules governing this are very complex and are particularly relevant to trusts. The grantor retains rights over assets in a trust. Therefore, the distributions are subject to estate tax.

Under the current law, a single individual’s estate can be worth $15 million or more. The surviving spouse may make a gift of up to $30,000 per year to each of his or her beneficiaries without incurring transfer tax consequences.

Similarly, a married couple can use their combined annual exclusion amounts. In this case, the surviving spouse can distribute up to $1.2 million per year. This method is generally used in cases where a single individual dies without leaving behind any heirs.

The federal government levies the estate tax when a person dies. This tax is paid by the estate itself before any of the estate’s assets are distributed to beneficiaries. Estate taxes are one of the oldest forms of taxation and are among the largest sources of federal tax revenue.

Unlike a gift tax, the estate tax only applies to estates that are worth more than one million dollars. However, some people opt to pass on assets to their heirs in order to avoid the estate tax.

How to reduce the taxable part of an estate in Arkansas?

Arkansas also does not have a gift tax. It allows the state`s residents simply gift away the taxable parts of their estates and protect their inheritance.

However, an Arkansas resident who has $13 million worth of estate cannot just gift away $940,000 at once and forget about it.

The Federal Gift Tax has an annual exemption, which allows you to gift away up to $16,000 to as many people as possible every year without having to file the tax return or affecting their lifetime exclusion.

Returning to our previous example, you would have to gift away the taxable part of your property through 59 years if you have a $13 million-worth estate in Arkansas and only one heir.

The good news is the annual gift tax exclusion rate as well as the lifetime exemption doubles for a married couple. It means that two spouses can gift away up to $32,000 to as many heirs as they want and protect up to $24,12 million worth of an estate.

There are also cases when gifts are not considered “taxable” even if they exceed the annual exemption rate:

  • Gifts between two spouses who are both US residents;
  • Payments for education and medical treatment once the funds are transferred directly to the organization that provides the service;
  • Donations to IRS-approved charities.

Gifting away the shares of your estate in Arkansas and considering the constantly changing tax exemption rates, you can easily reduce the taxable part of your estate, protecting your legacy for your heirs. 

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Gilbert, AZ