Explain U.S. Inheritance Tax

The Unites States has a variety of inheritance taxes.

Inheritance taxes have been in use for centuries, though modern-day inheritance taxes can vary greatly. In the United States, these taxes are levied at both the state and federal level and can apply anytime someone dies and leaves behind property or assets.

Terminology

Inheritance taxes are those that tax the value of property received after another person dies and bequeaths estate property to the inheritor. Other taxes, such as estate taxes, can often be referred to as inheritance taxes even though they are somewhat different. Depending on the state or federal law that applies, these taxes are called inheritance taxes, estate taxes or even death taxes. No matter the terminology used, these taxes apply only after a person dies and leaves behind property to beneficiaries.

Effects

When inheritances are taxed, it is up to the person receiving the property to pay the taxes based on their value. If the property is subject to an estate tax, the tax is taken from the value of the estate before any inheritances are distributed. Estate taxes decrease the amount the estate has to distribute, while inheritance taxes require inheritors to pay a portion of the amount received.

Calculations

Inheritance taxes can be based both on the value of the property received and the relationship of the beneficiary to the decedent. Indiana's estate tax uses this kind of relationship and value calculation. For example, if a lineal descendant of the decedent receives a $250,000 inheritance, he must pay $5,250 plus 4 percent of the remainder in inheritance taxes, or $9,790. Other relations would be subject to a higher tax.

Tax Avoidance

People who want to avoid inheritance taxes can use a variety of strategies. Life insurance can be used to pay for any inheritance taxes levied, gifting property to others while alive effectively removes it from being considered an inheritance, and trust funds enjoy a tax-protected status that does not make them subject to inheritance taxes. These tax-avoidance techniques can be used to ensure those who own property can pass as much down to their heirs and beneficiaries as possible.

Time Frame

Inheritance taxes are only imposed after a person dies, when a beneficiary receives an inheritance or both. The time when the decedent dies is an important factor in the applicability of the tax, as these laws typically use that date to determine what law applies.

References

• Findlaw: State Laws: Estate Taxes
• Cornell University Law School: Estate tax
• Internal Revenue Service: Estate Tax
• Monroe Bank: Indiana Inheritance Tax
• CNN Money: How to Avoid the "Death" Tax