Inheritance tax

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Inheritance tax, also known in some countries outside the United States as a death duty and referred to as an estate tax within the U.S, is a form of tax that may be levied upon the estate of a deceased person that is left to a living person or organisation. If an asset is left to a charitable organisation, most countries do not apply the tax. The tax is also imposed on other transfers of property made as an incident of the death of the owner, such as a transfer of property from an intestate estate, or the payment of certain life insurance benefits.

For UK Inheritance tax, see main article at Inheritance Tax (United Kingdom).

1 United States
2 Further reading
3 External links

United States

The U.S. federal government imposes an estate tax, calculated as a percentage of the part of the estate that exceeds the current exempted value. For 2005, an estate with a value less than $1,500,000 would not pay an estate tax and most likely would not have to file an estate tax return.

Many U.S. states also impose their own estate or inheritance taxes. Some states "piggyback" on the federal estate tax law as regards to estates subject to tax (i.e., if the estate is exempt from federal taxation, it is also exempt from state taxation); however, other states' estate taxes are independent of federal law, so it is possible for an estate to be subject to state tax while exempt from federal tax.

For estates larger than the current exempted amount, any estate tax due is paid by the executor or other person responsible for administering the estate. That person is also responsible for filing a return with the Internal Revenue Service. The return must contain detailed information as to the valuations of the estate assets and the exemptions claimed, to ensure that the correct amount of tax is paid.

Life insurance benefits generally form part of the gross estate for tax purposes, if the benefits are payable to the estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy. Similarly, bank accounts or other financial instruments which are "payable on death" or "transfer on death" are usually included in the taxable estate, even though such assets are not subject to the probate process.

The taxable portion of an estate can be reduced through charitable contributions or provisions that allow executors of some qualifying family-owned farms to reduce the taxable value of an estate's real property by some percentage of market value (up to certain limits) if certain eligible heirs continue to actively farm the property for over a decade.

Many of its opponents refer to the estate tax as the "death tax" and have called for its abolition. Since 2003, the top rate has dropped from 50% by one percent per year; it is scheduled to drop to 45% in 2009, thence to 0% in 2010, but as of 2005, if no further changes in the law are enacted, the tax will be reimposed at a top rate of 50% in 2011. It is, however, expected that Congress will enact legislation to change this in the intervening period.

Exemptions and Tax Rates

A certain amount of each estate is exempted from taxation by the federal government. Below is a table of the amount of exemption by year an estate would expect. Estates above these amounts would be subject to estate tax, but only for the amount above the exemption.

For example, assume an estate of $3.5 million in 2005. There are two beneficiaries who will each receive equal shares of the estate. The maximum allowable credit is $1.5 million for that year, so the taxable value is therefore $2 million. Since it is 2005, the tax rate on that $2 million is 47%, so the total taxes paid would be $940,000. Each beneficiary will receive $750,000 of untaxed inheritance and $530,000 from the taxable portion of their inheritance for a total of $1,280,000. This means that they would have paid (or, more precisely, the estate would have paid) a taxable rate of 26.9%.

Year	Max. Estate Tax Credit	Marginal Tax Rate
Year	Max. Estate Tax Credit	Marginal Tax Rate
2002	$1 million	50%
2003	$1 million	49%
2004	$1.5 million	48%
2005	$1.5 million	47%
2006	$2 million	46%
2007	$2 million	45%
2008	$2 million	45%
2009	$3.5 million	45%
2010	repealed	N/A

Debates

Some debates about the estate tax note the potential for double taxation, that is, the taxation on assets which have been taxed already. Double taxation occurs on earned income, but not the unrealized capital appreciation of houses, farms, stocks, bonds, real estate, and collectibles such as works of art. FactCheck.org cites a 2000 study of 1998 estate taxation, which determined that unrealized capital gains made up 36.3% of the value of all estates in 1998, and 56.4% of estates worth more than $10 million (but without taking into account yearly increases of inflation).

The debate about changes to or elimination of the estate tax sometimes revolves around which estates are affected by current law. The effects of the law on small business owners and family-owned farms (entities which, conservatives argue, are hardest hit by the estate tax, since nearly all of the estate value consists of the business or farmland) was studied in an analysis undertaken by the Tax Policy Center. A study of the 18,800 taxable estates taxed in 2004 found 7,090 which had any farm or business income. Of those, there were 440 estates in which half or more of its assets were the value of farms and/or businesses. Perhaps surprisingly, the effective tax rate on the 440 estates studied in detail never averaged more than 23%.

Estate value	Number of returns	Average tax (in thousands)	Effective tax rate
Estate value	Number of returns	Average tax (in thousands)	Effective tax rate
< $1 million	0	$0	0.0%
$1 - $2 million	190	$26	1.6%
$2 - $3.5 million	60	$190	7.5%
$3.5 - $5 million	40	$449	12.0%
$5 - $10 million	80	$1,322	19.3%
$10 - $20 million	50	$2,832	22.9%
> $20 million	30	$23,442	22.2%
All	440	$2,238	19.9%

Related taxes

The US also imposes a gift tax, assessed in a manner similar to the estate tax. One obvious purpose is to prevent a person from easily avoiding paying estate tax by giving away all of their assets during their lifetime. However, an exemption is available for transfers of up to $11,000 per person per year. A single donor can make gifts up to this amount to as many people as they wish each year, so if they have enough people they wish to give assets to and/or enough time, they may be able to reduce their estate enough to avoid estate tax.

Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax if certain other criteria are met.