Inheritance Tax Law

By Joseph Scrofano
Estate image by Yuriy Rozanov from Fotolia.com

Inheritance tax is different from estate tax. Governments levy estate taxes on the decedent’s representative when disbursing the estate’s assets. Governments levy inheritance tax on the beneficiary of the estate. In other words, if a father left property to his son in his will, when the son received the title to the house, the son would pay inheritance tax on the value of the property, while the representative of the father’s estate would pay the estate tax.

Federal Law

In the United States, the federal government does not impose a separate inheritance tax. The Internal Revenue Code provides for exemptions and credits to inherited property and gifts.

Credits

The Internal Revenue Code provides a lifetime credit for gifts received through inheritance. As of 2010, taxpayers can file up to $13 million in lifetime gift tax exclusions. This means, however, that estates in excess of $13 million will likely trigger an inheritance tax on the beneficiary of that estate. As of 2010, federal tax law provides an exclusion from the estate tax for estates valued up to $3.5 million.

Value

To determine applicable estate and inheritance tax laws, first calculate the estate’s fair market value. That includes assessing all of the estate's assets, including bank accounts, investments, bonds, insurance, real property and cash. The estate’s total fair market value is referred to as the “gross estate.” Next, the beneficiary should consider any adjustments to the estate. Adjustments include things such as, among others, paying off liens and attorneys fees. Once the adjustments are calculated, the remaining balance is considered the “net value of the property.” That amount will dictate whether inheritance or other taxes apply to the estate or beneficiary.

State Law

Most states have eliminated the inheritance tax. However, 11 states still levy one on estate beneficiaries as of 2010. These states are Tennessee, Pennsylvania, Oregon, New Jersey, Kansas, Maryland, Kentucky, Nebraska, Indiana, Connecticut and Iowa. Most states with an inheritance tax exempt spouses, and some states exempt children or other close relatives.

Estate Tax

Nine months after the property owner’s death, as part of the probate process, the estate’s representative must pay any federal and/or state estate taxes. Federal and state governments assess the estate tax, if applicable, to the net value of the property.

About the Author

An attorney and founder of ScrofanoLaw, a general practice law firm in Washington, D.C., Joseph Scrofano has been writing on legal issues since 2008. He holds a Juris Doctor from the Washington College of Law, a Bachelor of Arts with special honors from the University of Texas and a master's degree in international affairs from American University's School of International Service.