Simply put, death tax is the tax levied by a government on the privilege of transferring and receiving an estate. It is usually charged on the Net value of the estate that is transferred from a decedent to an heir. Taxable estate includes all the probate property, tangible and intangible, owned by the decedent plus all other interests such as joint ownership assets, insurance proceeds, annuities, and any other non-probate property.
Death tax, also called estate tax, is usually confused with inheritance tax which is actually a distinct form of taxation although closely related to death tax. The difference is seen mainly in their administration. Estate tax is imposed on the total value of the estate transferred to beneficiaries regardless of how the decedent would want it to be distributed. Inheritance tax on the other hand, is imposed on all the individual beneficiaries using rates that graduate depending on their relationship with the deceased person and also depending on the amount received.
The exact estate tax amount is relatively easy to calculate compared to inheritance tax. This is because valuing for estate tax only requires one to determine the Gross estate value and the value of deductibles. This makes administration of estate taxation a lot easier for the government and taxation authorities because it can still be collected irrespective of any unsettled distribution wrangles among the heirs. The total value of taxable estate is referred to as the Gross taxable amount in taxation terms and is calculated using the prevailing market values. The Net taxable estate is the gross taxable estate minus exemptions, estate administration expenses, loans, debts, mortgages, and other liabilities. In some cases the lifetime taxable gifts may be added to the Net taxable estate.
Estate tax exemptions can include publicly traded securities, estate left to a surviving spouse, lifetime gifts, estates valued below certain values, cash, joint tenancies and many others. Such exemptions are a very important part of death taxation laws because of several reasons. First and foremost, they bring justice and fairness to death taxation. Secondly, they create ease of administration and also reduce the costs of administration especially on large estates. The third and final reason is because death tax exemptions prevent tax evasion and reduce the number of tax payment defaults. Exemptions are also beneficial to the heirs of an estate because they reduce the value of their tax liability leaving them with substantial amounts of capital to invest in and generate more income.
The law requires an income tax return for an inherited estate and a final income tax return for the decedent to be filed with taxation authorities by the heirs, surviving spouses, executor or the fiduciary. This should be done within a specific time frame from the date of death of the original estate owner. This time frame varies from country to country and from state to state and defaulting can attract penalties. The Income tax return form is supposed to include an inventory of all property transferred their value, location, source and a list of persons responsible for payment of the death tax. The deceased’s final income tax return usually shows the income generated after their death such as unpaid salaries and bank interests earned.
In conclusion, estate tax is a government’s way of gaining revenue and instituting control. It is also in some sense, a way of encouraging more production efforts and accumulation of wealth by those with estate plans because they would want their beneficiaries to be left with substantial inheritance after death tax is charged.
Estate planning is an extremely important step in making sure the assets that are accumulated over a persons lifetime are managed in such a way as to limit the tax exposure, and to ensure it is dispersed according to your wishes.
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