Estate Tax
March 14, 2009
In the United States, tax is imposed on the transfer of ‘taxable property.’ Estate tax comes into play when the property of a deceased person gets transferred either by the instructions on his or her will, or in the absence of a will, by the laws governing the disposal of property. On the other hand, if there has been a transfer of property during a person’s lifetime, it is the gift tax that comes into play. Both the estate tax and the gift tax are a part of the Unified Gift and Estate Tax system in the United States. If a person happens to give away his property just before dying, it is the gift tax that is applicable and in such cases, the estate tax can be avoided.
In the United States, a uniform gift and estate tax is applicable to all the citizens of the country by the federal government. However, in addition to the federal government, several state governments also levy an estate and gift tax upon their citizens, which is usually referred to as the ‘Inheritance Tax.’ There are many arguments both in the favor of and against the imposition of Inheritance tax by the state.
The application of the estate tax is different in different cases. If the will of a person leaves all his assets to his spouse, the estate tax does not apply. The estate tax also does not apply if the assets have been donated to charity on a person’s death. Estate tax is usually applicable in the following scenarios:
• When the property gets transferred from a trust or an intestate estate
• When assets are received in the form of certain life insurance benefits
• When assets are transferred to beneficiaries of a will
The Federal estate tax is imposed “on the transfer of the taxable estate of every decedent who is citizen or resident of the United States.” The taxable estate is that part of the estate that is left over after certain allowable deductions have been made from the gross estate. Some of the deductions that are allowed to make the taxable estate smaller include:
• Expenses towards the funeral of the deceased owner of the estate
• Expenses towards administration expenses of the estate
• Expenses incurred in resolving claims against the estate
• Amount donated to certain charities from the estate
• Assets that are transferred to the living spouse of the deceased owner of the estate
Apart from these deductions, any inheritance or estate taxes paid to states or the District of Columbia can be considered as a deductible amount from the value of the gross estate since 2005.
Amongst these deductions, the one with the highest significance is that part of the property that gets transferred to the living spouse of the deceased estate owner. Under law, this amount which can be unlimited, is eliminated from any federal tax. However, deduction of unlimited estate is applicable, if and only if, the surviving spouse of the deceased estate owner is a U.S. citizen. In the event that this is not the case, a Qualified Domestic Trust or QDOT needs to be used to allow unlimited tax free access to the surviving spouse.
An estate tax is levied on all estates other than those which are small enough to be exempted under the federal law. The estate tax has to be paid by one of the following people:
• The person who is in possession of the estate after the death of the owner
• The person who is responsible for the estate’s administration
• The person who is appointed as the executor of the estate
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