Estate Tax

Estate Tax

What is Estate Tax?

Definition: Estate tax is the tax that is required to be paid to the government when a person dies. It is levied by the federal government as well as some states.

What does Estate Tax mean?

All your possessions including the assets that you partially own could be subject to estate tax. This tax is also referred to as inheritance tax.

Estate tax is usually calculated on the current price of the assets and not at the cost at which they were acquired. The following types of assets are subject to estate tax:

⇨ Cash

⇨ Financial securities

⇨ Real property

⇨ Share in a business

Remember that this is not a comprehensive list. Other types of property/assets could be subject to estate tax too.

There are specific deductions available when the amount of estate tax is being calculated. For example, the amount that passes on to a spouse is not taxable. The sums paid to qualified charities are also exempt.

Estate tax is not only applicable to the assets that are owned by a person at the time of his or her death. It could also apply to the value of the gifts that were made during an individual’s lifetime. According to the applicable law, gifts made from 1977 onwards are to be included when estate tax is being calculated.

The estate tax that is charged by the federal government is only applicable if a person’s gross estate exceeded $11.4 million at the time of death. This sum is applicable for 2019. The rate of tax varies from 18% of the amount that is to be taxed up to a maximum rate of 40%.

Example of Estate Tax

Let’s consider the example of an individual, Mr. A, who dies in 2019. His estate is worth $15 million. All Mr. A’s possessions are passed on to his wife at the time of his death. Estate tax will not be charged in this situation.

Several years later, Mrs. A dies. She leaves all her assets to her only child, Mr. B. The estate will be subject to estate tax if the amount exceeds the exclusion limit. Of course, this assumes that the law that exists today remains in force.

Here is an example of Estate Tax evasion in the real world.

Summary

Estate tax is payable on a person’s property upon that individual’s death. It is applicable only if the value of the financial assets and property that are subject to tax exceed the exemption limit. There are specific deductions that are available when the taxable amount is being computed.