How Does Estate Tax Work?

Tax on Inheritance

When an individual dies, his assets is transferred to his beneficiary as stated in his will. The estate tax is the fee that the government collects from this transfer. This transfer is usually from the last surviving parent to his offspring. This is not applicable for married couples since both the husband and wife equally own the estate. There’s also such a thing as a federal gift tax so that taxpayers won’t be able to avoid paying the estate tax by transferring large amounts of their wealth before the death of the estate owner.

Rate Based on Value of the Estate

The tax rate on estates is based on a progressive scale of taxation, with a range of 18% for low value estates up to 45% for estates that are valued over $2 million. An estate’s value is the sum of all its assets, including monetary holdings, real estate and investments, as well as assets which are not directly owned by the benefactor, like life insurance and annuities. At present, there is a flat rate for the estate tax, virtually reducing estate tax to zero for estates valued for less than $2 million. This amount, however, increased to $3.5 million back in 2009.

Other Considerations

According to the federal gift tax code, an amount of up to $12,000 ┬ácan be given to any number of beneficiaries each year. Through this gift allowance, an individual can easily allocate money to his progeny without having to pay the extra taxes, and even cut down his estate’s value below the rate of the estate tax.

The estate tax is considered to be one of the more litigious taxes since it has to deal with money and assets that have already been taxed in the past. Most of the beneficiaries of estates didn’t work for any of the properties that they inherit, and this tax free transfer of wealth only increases the gap between the rich and the middle class. It has even been named as the “death tax” because of all the negative impressions attached to it.



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