Federal Inheritance Tax
There is no such thing as a federal inheritance tax. When you die, the federal government taxes your estate and this is called an estate tax. It is completely different from an inheritance tax, which is imposed by some states. The state inheritance tax is called a death tax and it is imposed on money and property at the time of your death. This tax is typically levied against the heirs and is based on the amount of inheritance and the relationship to the deceased, called the decedent. The tax rate is usually a graduated rate.
Under the inheritance tax there are five types of allowable exemptions:
- Personal exemptions based on the relationship between the deceased and each heir;
- Specific amounts of exemptions allowed for the entire estate;
- Exemptions for taxes that have already been paid on the property;
- Exemptions for bequests of money to charities or educational institutions;
- Exemptions for specific types of property;
The most important one of these exemptions as they apply to beneficiaries is the one that is based on their relationship to the decedent. If the beneficiary is a distant relative or friend, then the tax rate is much higher than if he/she is a close family relative, such as a child, grandchild or sibling. Since each state has its own tax rate for inheritance taxes, there are differences in the exemption amounts. However, a typical exemption for a child would be the first $3,000 is tax-free and after that the tax is 7.5% on amounts exceeding $100,000. However, for distant relatives and friends the exemption is only $100 and the tax rate can range from 6% to 30% depending on the amount of the inheritance.
There have been many concerns in recent years about the imposition of the inheritance tax. Opponents of this tax argue that it puts undue strain on a family in their time of grief. It impacts the heirs who probably need the money and often divides families. Wealthy families believe that they worked all their lives to provide some inheritance for their children and do not agree that the state is entitled to receive any benefit from it in the form of additional taxes.
It does have an effect on the savings, investment and the work effort of people. If a person does not have an intimate knowledge of the tax system and does not have a financial advisor, the family will end up having to pay out a lot of money in taxes when someone dies and leaves them money.
Opponents to the inheritance tax laws also argue that the existence of this tax forces people to attempt to defraud the government when they are filing their income tax returns. It forces people to give gifts of money before they die to avoid burdening their loved ones with tax problems. A problem may also arise where a family-owned business is part of the inheritance. However, inheritance taxes are only levied on a small portion of personal property, so this would affect only a few families. These opponents also claim that the tax forces people to set up trusts for the beneficiaries and find alternate ways of getting around the tax laws.
Some states have abolished the inheritance tax altogether, just keeping the estate tax levied by the federal government in place.
Looking For A Probate Lawyer In Your Area?
Select Your State Below To Find One Today
2008-04-07 12:21:18
Probate is the legal process of settling a deceased person's estate, which includes paying creditors or debts, and distributing the assets of the deceased to the correct beneficiaries. It is a complic ... [read more]