Do You Need to Pay an Inheritance Tax?

Inheritance tax is a tax imposed on the privilege of receiving property by inheritance or legal succession and assessed on the value of the property received. It is sometimes also called death tax. In some states, a tax is imposed on those who inherit assets from a deceased person. The tax rate for inheritance taxes varies with the value of the property received by the heir or beneficiary and his or her relationship to the decedent.

There are a few countries in which inheritance tax is known as a "death duty" and is occasionally called "the last twist of the taxman's knife".

Inheritance tax is not the same as estate tax, which is imposed on the total value of a person's estate, i.e., the value of all property left by the decedent when that person dies. On the other hand, inheritance tax is imposed on the property that is passed to an heir, i.e., the amount an heir receives.

Inheritance tax, which was first imposed during the Roman Empire, is likely to be more difficult to administer than estate tax because the value passing to each beneficiary must be fixed, and this often requires complex actuarial calculations. In the United States, inheritance taxes have always been collected by the individual states, while the federal government has the job of imposing an estate tax. Pennsylvania was the first state to impose inheritance tax in 1826.

Both the federal government and the states work on roughly the same principle. Whenever an individual is named in a legal will as the recipient of assets from an estate, the person may be liable for an inheritance tax to the state. This is identical with taxes levied on the property itself, but due just for the right to assume ownership. The inherited property is assessed and, depending on its value and the inheritor's relationship to the deceased, an inheritance tax may or may not be levied.

At present, an inheritance tax has more exceptions and exemptions than most other tax laws taken together. First of all, the value of the property or monetary asset must exceed $1.5 million in order to even qualify for the inheritance tax. This eliminates most inherited property immediately. 'Class A' relatives, which include spouses, children, parents and grandchildren, are also exempt from an inheritance tax. However, imagine the plight of a favorite cousin who inherits his uncle's $3.5 million mansion in the Hamptons. The poor fellow would face up to a 50% inheritance tax on the property, which would mean an instant debt of $1 million or more.

Only a select number of citizens are now affected by an inheritance tax, but it is still a controversial political issue. Although many other nations have eliminated or severely limited their own versions of the inheritance tax, the United States government still continues to keep some form of estate tax on the books. Getting rid of the 'death tax' may help many of the country's wealthiest citizens remain wealthy, but the general population has little to worry about an inheritance tax law.

Estate taxes are usually due nine months after the death of an individual. However, estates involving closely held businesses can make installment payments instead. These installment payments, including interest, can be spread out over as long as 14 years, and the first $1 million of the business's value is eligible for only a 4 percent interest rate.