The State of Arkansas cannot tax your inheritance. It is one of 38 states that does not apply a tax at the state level. However, out-of-state property may be subject to estate taxes from the state in which it is owned.
Estate planning is complicated, so you should always speak with an estate planning attorney. He or she can help you devise a strategy that meets your end-of-life objectives while navigating intricate laws.
What’s the Difference Between Inheritance Taxes and Estate Taxes?
Sometimes, people refer to inheritance taxes and estate taxes interchangeably, but there are significant differences between the two.
- Inheritance taxes are paid by an heir when inheriting personal property or money from a person who passed away. Since there are no federal inheritance taxes, states can levy them. Arkansas is one of the states that does not levy inheritance taxes.
- Estate taxes are levied on the decedent’s entire estate. Estate taxes are taken before the estate is distributed to the heirs. A federal estate tax applies to all transfers after death.
Arkansas is generous when it comes to inheritance taxes: instead of applying an inheritance tax after an estate tax, heirs do not have to shoulder the financial burdens of receiving the property.
Be careful when it comes to bequeathing property from out of state. Many other states have an exemption amount that varies. This is one of many reasons why an estate planning attorney is helpful for creating a personalized plan for limiting tax consequences.
Even though Arkansas has not collected inheritance or estate taxes since 2005, legislation is always subject to change. It’s important to remember that it’s the laws that are in effect upon your death—not the ones that were active when you created your plan—that apply to your estate.
Is There a Federal Inheritance Tax?
The federal government does not apply an inheritance tax. Additionally, the Internal Revenue Service (IRS) will not tax most inheritances as income. However, there are always exceptions to the rule.
Like IRAs and 401(k)s, retirement accounts are taxable as income, but only when you make withdrawals as the beneficiary. If you inherit income-generating interests, you will likely have to pay taxes after taking possession of them.
Why Should You Plan for Federal Estate Taxes?
Although Arkansas does not require you to pay an inheritance or estate tax, you’re not exempt from paying them entirely. In 2021, the current federal estate exemption is $11.7 million—but you could end up losing your money to taxes if you don’t plan appropriately.
Keep in mind that the federal exemption amount fluctuates regularly and is set to drop back to $5 million in 2026. The exemption amount is set when you pass away, not when you make your plan.
Other federal exemptions include:
- Gift tax annual exemption. Currently, there is a gift tax annual exemption of $15,000 per person. This means you can give up to $15,000 per year to as many people as you wish without incurring taxes. This amount doubles if you are married.
- Gift tax lifetime exemption. If you give more than the allowable amount annually, you can take the unified credit that applies to the total of the gifts made over your lifetime. As of 2021, this exemption is $11.7 million.
- Spousal exemption. There are unlimited, tax-free transfers that can occur between spouses. You may also use a deceased spouse’s exemption, but you must indicate your intention of doing so on your tax returns.
There are several reasons to consider tax protections into your estate plan, even in Arkansas. While the state does not collect estate or inheritance taxes now, federal taxes will continue to shrink over time.
Can Heirs Refuse a Bequeathment to Avoid Taxes?
You can use a generation-skipping transfer tax or disclaimer to refuse property that would pass to you or a loved one upon death. In your disclaimer, you can specify that the property passes to the next person in line for the property.
If the property is passed from the decedent to the beneficiary who is next in line, it could save thousands of dollars on federal estate taxes. A disclaimer or provision like this allows additional flexibility when transferring assets under marital deductions, credits, and lower-income tax brackets.
Estate Planning for Taxes in Arkansas
Like any other form of financial planning, estate planning requires careful consideration. There are numerous legal resources available that can help you plan your estate and end-of-life affairs, including living trusts, pour-over wills, advanced directives, and powers of attorney.
An estate planning lawyer can provide legal advice and guidance while you make these critical decisions. We can help determine which estate planning documents you need while executing them according to your specifications.
Learn more about how an estate planning lawyer at Milligan Law Offices can help you plan for your family’s future. Contact us for your initial consultation by calling (479) 783-2213 or by sending a message through the form below.