Inheritance tax is different from estate tax, which is a federal tax imposed on an individual’s entire estate (including cash, investments, cars, boats, real property, art, jewelry, etc.) at the time of their death. The estate tax is paid by the estate itself, and it is the responsibility of the executor/administrator (appointed by the decedent) to carry out. Inheritance tax, on the other hand, is levied by state governments and is the responsibility of the beneficiary to pay.
It is important for every person to understand how to leave their assets to heirs (or other designated beneficiaries) with little or no inheritance tax consequences.
What Is Inheritance Tax?
The amount of inheritance taxes depends on the type of the property inherited and the relationship of the beneficiary to the deceased person. In general, a decedent’s immediate relatives (children, spouse, or parents) are able to claim exemptions that can reduce the amount of inheritance taxes levied. Beneficiaries who are not direct lineage relatives, however, are typically subject to higher inheritance taxes.
Many people believe that inheritance taxes, or “death tax” as it is commonly called, is unethical and unfair because it places a strain on the family who has just lost a loved one and it reduces the amount of the inheritance. For instance, if the owner of a family business has passed away, the heirs may be forced to liquidate the business in order to pay any inheritance taxes. In addition, some states charge both an estate tax and an inheritance tax ― this “double dipping” is another source of anxiety to those favoring a repeal of the inheritance tax.
Opinions Around Inheritance Tax
Supporters of the inheritance tax claim that it is a way to “redistribute the wealth” and ensure that richer Americans are paying their share of taxes to the government. Whatever your opinion on the matter may be, remember that the inheritance tax is subject to the discretion of the individual states ― some states enforce an inheritance tax, and some states have actually repealed the inheritance tax.
Leaving your loved ones in good hands can be doable with a little information on how to get what you deserve.