Estate taxes are taxes imposed by the federal government on property that is transferred after a person dies, whether according to deceased person’s will or other estate planning documents, or by order of the probate court. While it is commonly known that federal estate taxes apply in certain cases, states may also tax such inheritances. To explore this concept, consider the following estate taxes definition.
Definition of Estate Taxes
- A tax imposed on assets transferred from a decedent to his heirs and beneficiaries.
1905-1910 IRS tax law
What are Estate Taxes
Estate taxes, also referred to as “inheritance taxes,” or “death taxes,” are federal taxes imposed on the property and financial assets transferred to an individual upon another person’s death. Estate taxes are among the world’s oldest forms of taxes, dating as far back as the time of Aristotle. The U.S. began imposing estate taxes as early as the mid-19th century. The issue of estate taxes has been heavily contested throughout U.S. history, and this type of tax has been instituted, repealed, and reinstated several times. President Roosevelt finally reinstated estate taxes during the Great Depression, and they have remained in effect, though with a number of revisions, since that time.
Estate taxes are calculated based on a percentage of the estate value at the time of the decedent’s death. As of 2015, U.S. federal estate taxes are levied only on estates worth more than $5.43 million, and twice that amount for married couples. Some states impose their own version of estate taxes, though they are usually referred to as “inheritance taxes.”
State Inheritance Taxes
The state in which the deceased person lived may impose an inheritance tax in addition to any federal estate tax that is due, and it may apply even if the inheritance does not meet the minimum amount to be taxed under IRS law. If the decedent owned property located in a state other than where he or she lived, that jurisdiction may also impose an inheritance tax.
As of 2015, only a handful of states levy estate or inheritance taxes. If property inherited is not located in a state that has an inheritance tax, the beneficiary will not have to pay such a tax, even if his own residence is in an estate-tax state.
As of 2015, the states levying estate taxes include:
- New Jersey
- New York
- Rhode Island
If the deceased lived, or the property is located, in one of these states, the value of the entire estate must exceed the state’s exemption minimum before a tax will be imposed.
Federal Estate Taxes
A beneficiary inheriting an estate valued over a specified amount is required to file a federal estate tax return. As of 2015, the federal minimum estate value for taxation is $5.43 million per person, though the amount may change from year to year. In establishing the true value of an estate, the beneficiary must include cash, stocks, bonds, real estate, mortgages, and insurance payouts.
If the estate is jointly owned by a married couple, and one spouse dies, only one-half of the estate is included in the gross estate value for the purpose of taxation. A required federal estate tax return must be filed with the IRS within one month of the decedent’s death, though extensions are often granted upon request. On average, estate taxes owed to the IRS must be paid within nine months of the decedent’s death.
Federal Estate Tax Exemption
A federal estate tax exemption refers to the amount of an estate’s value is exempt from taxation. For example, if Marilyn inherits her mother’s estate, which is worth $73,000, she would not have to pay a federal estate tax. This is because the estate’s value is within the $5.43 million personal federal estate tax exemption.
An individual inheriting the estate of a spouse can file a marital federal estate tax exemption. This means that the deceased person can leave their estate to their surviving spouse without it being taxed, so long as the assets are transferred directly to the surviving spouse. For example, John dies and leaves his wife, Barbara, an estate worth $10 million, and leaves his daughter an estate worth $7 million. As long as Barbara is a United States citizen, and the assets of the estate are transferred directly to her, she does not have to pay a federal estate tax. John’s daughter, however, will have to pay federal estate taxes in the amount of $1.57 million ($7 million inheritance minus the $5.43 million personal exemption).
Related Legal Terms and Issues
- Beneficiary – A person named in a will or trust as the intended recipient of assets or property.
- Decedent – A person who has died.
- Jurisdiction – The legal authority to hear legal cases and make judgments; the geographical region of authority to enforce justice.
- Probate Court – The section of the judicial system that deals with matters relating to wills, trusts, estates, guardianships, and conservatorships.
- Testator – A person that has created a will.