An inheritance tax is a tax that some states require the recipients of inheritance to pay. Estate tax, on the other hand, is paid by the estate of the deceased if it is required. Fortunately, Arkansas is not one of the handful of states that still require inheritance tax to be paid. There is no federal estate tax, either, so beneficiaries in Arkansas will never have to pay an inheritance tax unless they inherit real property that is located in a state that does charge inheritance tax. These states are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Are There Ever Taxes Due on an Inheritance in Arkansas?
While there is no federal inheritance tax and no Arkansas inheritance tax, there may be certain instances in which a beneficiary will have to pay income tax on part of their inheritance. For example, if the beneficiary inherits a retirement account, such as a 401k, 403b, or pension fund, they may have to pay income tax on early withdrawals, just as the original owner would have. Heirs may also have to claim earnings on inherited assets on their income tax forms if the earnings were accrued after the asset was inherited. Otherwise, inherited assets are not counted as income for income tax purposes.
What is the Difference Between an Inheritance and an Estate Tax?
An inheritance tax is charged to the person who inherited the assets. Again, this is only the case in the 6 states listed above. Estate taxes, however, are based on the value of the estate in its entirety and are paid out of the estate before assets are distributed to heirs. While state-level estate taxes are more common than inheritance taxes in the U.S., with 12 states requiring them, Arkansas is still not one of them. There is no Arkansas estate tax. There is a federal estate tax, but this only applies to estates valued at $12 million and up.
Why Do I Need an Estate Plan if Arkansas Has No Inheritance or Estate Taxes?
Estate planning encompasses far more than tax avoidance. Without a comprehensive estate plan, you will not be able to designate who will speak or act for you in financial, legal, or medical decisions, you will not be able to designate what happens to your assets after you die, and you will put your family through unnecessary stress and, possibly, financial struggle. Everyone should have a will, a durable power of attorney, a health care power of attorney, and an advance directive for health care (living will) at a minimum. Without these documents, you surrender all ability to direct how your affairs and health care will be handled should you become incapacitated or die. Beyond that, trusts and other estate planning tools can help to secure your family’s future after you are gone. Speak to one of our experienced attorneys to begin your estate plan today.