Estate Tax - Explained
What is an Estate Tax?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is Estate Tax?How Does Estate Tax Work?What are the Connections Between Estate Tax and Gift Tax?Differences between Estate Tax and Inheritance TaxAcademic Research on Estate Tax
What is Estate Tax?
An estate tax is a government levied tax on any inheritance or portion of an inheritance if its total value surpasses what is termed as tax exclusive inheritance by law. Estate taxes are mostly charged to the heirs of a deceased, but in a case where the beneficiary is a surviving spouse of the deceased, there will be no need for an estate tax. The reason why a surviving spouse wont be charged estate tax even when the inheritance surpasses the tax exclusion limit is because any property transferred from a deceased to his or her surviving spouse qualifies as marital deductions, and this grants it immunity to taxation. However, in a case where this spouse dies, the next beneficiary would have to pay the estate tax if the value of the property still exceeds the limit set by law as of the time of the transfer.
How Does Estate Tax Work?
Due to the high rate of estate tax, most persons who are willing or looking forward to transferring their properties to their heirs after death are recommended to engage in proper estate planning before death. The Internal Revenue Service proclaimed in 2018 that estates with combined gross assets of $11.18 million were required to file a federal estate tax return and also mandated to pay estate taxes. In other words, estates that that are worth below this amount are not required to pay tax. So if an estate is worth $11.12 million, it wouldn't be required to pay tax despite the small difference. Before 2018, the benchmark was quite lower. In 2017, the IRS required that estate worth up to $5.45 million was required to pay inheritance tax, and estate worth up to $5.49 was taxable in 2017.
What are the Connections Between Estate Tax and Gift Tax?
Gift taxes are charged when the taxpayer is still alive, while estate taxes are charged when the taxpayer is deceased and his or her property is transferred to a beneficiary apart from his or her spouse. Gift taxes act as a preventive measure to avoid estate taxes which might occur when the taxpayer wishes to transfer all their assets to their heirs. The IRS has also proclaimed that gift taxes must be charged on any donation, whether it was meant with such intentions or not. However, the Internal Revenue Service has also decided to make quite a few exceptions to this rule. In 2018, any gift of up to $15,000, but not more than $15,000 was eligible for exclusion from gift taxes. Simply out, a tax payer could donate or give out up to $15,000 to any person they so wish without paying a dime to the IRS on it. Also, the agency also allowed a gifting process of up to 10 persons. Here, a tax payer can donate $15,000 each to 10 persons (totaling $150,000) without having to pay tax. However, if he gives a person among those ten individuals $20,000, and gives another $10,000, hed be required to pay a tax on the additional $5,000 which he released as gift to his beneficiary. In this case, the amount of gift tax would be calculated and added to his estate tax.
Differences between Estate Tax and Inheritance Tax
In an estate tax, the value or sum to be paid are applied to the estate before they can be transferred to the beneficiary. On the other hand, inheritance taxes are applied to the assets after the beneficiary has fully received them and claimed ownership. Inheritance taxes can command different amounts depending on the inheritance gotten and the jurisdiction of the deceased taxpayer as well as the location of the property. In most cases, some states would be reluctant to charge inheritance taxes, especially when the inheritance are lesser than a certain amount. They also offer exclusions on inheritance received from spouses. In most cases, the children of the deceased are generally tax-exempt, and in a case where the beneficiary is not a direct heir to the dead taxpayer, inheritance taxes would be charged based on the relationship between the taxpayer and the stated beneficiary. States like Minnesota, Washington, and Oregon all make use of estate taxes.