When we talk about the most obvious difference between two common tax types; inheritance taxes and estate taxes, it mainly comes down to the payee of the tax. When an individual dies, these two terms are often interchanged. However, these are two entirely different kinds of death taxes.
The calculation of inheritance taxes is usually based on a demised individuals’ estate and the total value of bequests sent by it. This tax is to be paid by the beneficiaries.
On the other hand, the calculation of estate taxes depends on the assets owned by a decedent and its net value by the date of their death. The liabilities of estate are deducted from the total value of the property of the demised that is deduced to the estate assets taxable estate (net). The estate is responsible for paying any resulting taxation.
Here is a detailed explanation of both types of taxes to help you understand each term in a better manner:
Estate Tax
In the US, the estate tax is a tax applied on the transfer of a deceased individual’s estate. This tax mainly applies to assets that are transferred according to intestacy state laws or through a legal will. Financial account sums transferred to beneficiaries, transfer of some benefits of life insurance and transfers made via a trust or an intestate estate are some types of transfers that can be subject to taxation. Estate taxes are one portion of The Estate Tax system and Unified Gift in the US. The remaining system consists of the gift tax which applies to property transfers when a person is alive.Inheritance Tax
An individual who inherits property or money of a deceased person pays inheritance tax. By the 1898’s War Revenue Act, a succession duty was imposed by the US on all distributive shares or legacies of personal assets exceeding the value of 10,000 dollars. This tax applied to the individuals benefiting from the privilege of succession. It did not affect the land distributions or devises of land in any way.
This duty started with 75 cents on 100 dollars and went up to 5 dollars on 100 dollars (only when the value of the share or legacy in question didn’t go above 25,000 dollars). On the legacies or shares that went over that amount, the rate was increased 11 times on properties that went up to 100,000 dollars and twofold on properties valued between 100,000 and 200,000 dollars. Moreover for the properties valued from 500,000 dollars to one million dollars, the rate was multiplied 21 times and for estate value exceeding a million, the rate became threefold. The United States Supreme Court upheld this stature as constitutional.
Transfer taxes or succession duties are imposed by many US states. Typically they are imposed on remote or collateral succession and the tax depends upon the succession amount. Typically, state duties are imposed on successions to personal property and real estate. For instance, suppose some registered bonds are owned by a person in state X. The bonds are of a corporation that is chartered by state Y. Then the bonds are directed in a deposit vault for safe keeping and the deposit vault is located in state Z. In such case, the estate’s owner might be required to pay 4 individual succession taxes. The first one to X state where they belong to, the second to Y state for authorizing the transfer, the third to Z state for permitting the removal of assets from deposit vault for a given purpose and lastly, the fourth to the US.
When Is the Inheritance Tax Exempted?
Your chances of receiving a reduction or an exemption in the inheritance tax you are required to pay greatly depend on your family connection to the demised person. For instance, many states exempt a partner from the inheritance tax when they become heir to properties of another spouse.
The same tax exemption might apply to other dependents such as children. However, sometimes only a limited portion of the estate inherited may qualify for this exemption.
Now that you’ve learned all about the basic difference between two of the most common tax types; estate tax and inheritance tax, we hope you will be able to carry out the estate planning process in question with ease. However, if you are still confused about the aforementioned legal terms, you can always consult a professional estate planning lawyer who can guide you through the process!
