New Mexico does not impose an inheritance tax, but residents may be subject to the federal estate tax if their estates are significant.

This guide aims to assist Land of Enchantment residents in understanding the pertinent details to manage estate tax matters. It also aims to help them safeguard their estates. It also helps them prepare their families for the eventualities following their demise.

Engaging the services of a professional is a highly recommended approach for effective estate planning.

Inheritance Vs. Estate Tax — What’s The Difference?

The primary distinction between inheritance and estate tax lies in the timing and recipients of the tax assessment. The state levies the deceased’s estate or the individual transferring assets before distribution to heirs.

This tax on inheritance is calculated based on the total value of the assets at the time of transfer. Conversely, the law imposes estate taxes on the beneficiaries who receive the assets.

Additionally, there is a significant difference in the tax’s scope at the federal and state levels. The federal government does not impose an estate tax — only specific states have inheritance taxes.

On the contrary, a federal estate tax applies universally, and some states may also impose their estate tax at the state level.

Inheritance Taxes — How Do They Work?

The US inheritance tax taxes the transfer of assets from a person to their beneficiaries. It is levied on the beneficiaries of the assets.

The taxing authorities calculate the tax based on the value of the assets at the time of gifting. Tax rates hinge on inherited asset value, owner-beneficiary ties, and residency status, influencing estate tax assessments variably.

Following a person’s death, their assets are distributed under the instructions in their will. Suppose there is no will based on the laws of the state.

Asset value and beneficiary ties determine the tax on endowments from deceased estates.

While no federal inheritance tax exists, certain states impose taxes on inheritances. Nevertheless, even in states with a tax, exemptions often exist for assets distributed to a spouse and specific asset types. These exemptions may also apply to particular other beneficiaries following the rules of each state.

Six US states impose taxes — New Jersey, Kentucky, Nebraska, Iowa, Maryland, and Pennsylvania.

Strategies to Minimize Tax in a State with Imposed Inheritance Tax

There are various approaches to enhance what you leave to future generations and mitigate or eliminate the tax burden.

Transfer Assets

Transfer the assets to beneficiaries as early as possible. It avoids inheritance taxes and enables the assets to appreciate, facilitating efficient wealth compounding.

Establish a Trust

Establishing specific types of trusts can enable the transfer of your assets without being subject to the estate tax.

Grantor Retained Annuity Trust (GRAT)

Two common trust structures serve this purpose, the first being the Grantor Retained Annuity Trust (GRAT). By establishing a GRAT, you can transfer assets into the trust, and any appreciation above a specified percentage passes to your beneficiary’s estate tax-free.

This method minimizes gift exemption depletion and reduces taxable estate size, preserving assets effectively. Direct-indexed GRATs can be employed to enhance returns.

Dynasty Trusts

These US inheritance tax structures help individuals and families preserve their wealth and reduce or avoid estate and inheritance taxes. They also ensure that assets are effectively managed and distributed according to their preferences across multiple generations.

A dynasty trust is especially beneficial for families seeking to transfer substantial wealth from generation to generation. It’s essential to note, however, that dynasty trusts are irrevocable.

Therefore, they may not be suitable if your family’s needs are subject to change. Additionally, if family dynamics are sufficiently unsettled, crafting distribution rules for both the foreseeable and unforeseeable future becomes challenging.

Relocate to a Tax-Friendly State

Move your trust to a tax-friendly state like Nevada or South Dakota to avoid federal inheritance taxes and save money. This relocation also provides a convenient approach to preserving and planning for wealth succession.

Firstly, individuals can reduce the financial impact on the grantor and beneficiaries. The lack of state income tax ensures that any income generated within the trust is not subjected to additional taxation.

Furthermore, exemption from inheritance and state estate taxes guarantees a tax-efficient transfer of assets to heirs, thereby protecting family wealth.

What to Remember about New Mexico’s Inheritance Taxes

New Mexico has no inheritance taxes, and residents are not subject to a state-level estate tax. However, it’s essential to know that you might owe inheritance tax in another state. It could happen if someone residing in a state with an inheritance tax leaves you an inheritance.

For instance, Pennsylvania enforces an inheritance tax on assets passed down by individuals residing in the state, regardless of the recipient’s state of residence.

Check local laws when your benefactor lives elsewhere to avoid missing tax obligations and facing the consequences.

In addition, New Mexico does not impose a tax on inheritance. At the federal level, the gift tax has a $16,000 annual exemption per gift recipient in 2022, which increases to $17,000 in 2023. If you give one person more than $17,000 in a single year, you must report that gift to the IRS.

Any amount surpassing the $17,000 exemption contributes to your lifetime $12.92 million gift tax exemption and diminishes your federal estate tax exemption.

inheritance tax

Commission a Lawyer for Tax-Related Concerns

For expert legal assistance with tax matters in New Mexico, visit Cristy J. Carbón-Gaul. With a wealth of experience, she can guide you through the complexities of inheritance tax. She ensures your assets are protected, and your family’s financial future is secured.

Don’t navigate these inheritance tax challenges alone — trust Cristy J. Carbón-Gaul to provide the expertise you need. Visit her now for personalized legal support.