Death Duty (Estate Duty)

Definition

Death Duty (Estate Duty) refers to a tax imposed on the estate of a deceased individual. This tax is calculated based on the total value of the deceased person’s estate according to the applicable tax regulations. Upon death, the estate (including properties, investments, and other assets) is assessed, and a tax is levied accordingly. In the United Kingdom, this is known as Inheritance Tax.

Examples

United Kingdom Inheritance Tax: When a person dies in the UK, their estate may be subjected to an Inheritance Tax if its value exceeds a certain threshold (currently £325,000 as of 2023). For instance, if the estate is valued at £500,000, the tax will be calculated on £175,000 (the amount above the threshold).
United States Estate Tax: In the United States, the federal estate tax is imposed on estates valued over a certain exemption limit ($12.9 million in 2023 for individuals). Suppose an estate is valued at $15 million; the tax is applied to the $2.1 million above the exemption limit.
Canada: While Canada does not have an estate tax, a similar result occurs through “deemed disposition,” where the estate must pay capital gains tax on the difference between the cost and the market value of the decedent’s assets.

Frequently Asked Questions (FAQs)

What is the purpose of death duty or estate duty?

The purpose of death duty is to raise government revenue and ensure that wealth is distributed more evenly across society. It prevents the concentration of wealth in the hands of a few by taxing the transfer of substantial estates from one generation to the next.

Who is responsible for paying estate duty?

The estate executor or administrator is responsible for ensuring that the estate duty is paid. This is typically done before the remaining estate assets are distributed to the beneficiaries.

What assets are included in calculating death duty?

Assets typically included in the death duty calculation are real estate properties, savings, investments, retirement accounts, valuable personal items, and life insurance policies payable to the estate.

Are there any exemptions to estate duty?

Yes, many jurisdictions have exemptions or thresholds below which no estate duty is payable. For example, in the UK, estates valued below £325,000 are usually exempt from Inheritance Tax.

Can beneficiaries contest the estate duty amount?

Beneficiaries can contest the valuations used in calculating the estate duty if they believe them to be incorrect. This usually requires proof or an independent valuation to challenge the tax authority’s assessment.

Is gifting assets a way to reduce estate duty?

In some jurisdictions, gifting assets before death can reduce the taxable value of the estate. However, there are often rules and limitations, such as the need for the individual to survive a certain number of years after making the gift for it to be exempt from estate duty.

Inheritance Tax: A tax imposed on individuals who inherit property or money from a deceased person.
Gift Tax: A tax on the transfer of assets from one individual to another while receiving nothing or less than full value in return.
Probate: The legal process through which a deceased person’s will is validated, and their estate is settled.
Estate Planning: The act of preparing for the transfer of a person’s wealth and assets after their death.
Taxable Estate: The portion of an estate’s value that is subject to estate taxes, after accounting for deductions and exemptions.

Online References

Suggested Books for Further Study

“Estate Planning Essentials” by Wendell Corporation: An accessible guide covering the basics of estate planning.
“The Complete Book of Wills, Estates & Trusts” by Alexander A. Bove Jr.: Offers detailed guidance on managing an estate.
“Plan Your Estate” by Denis Clifford: A comprehensive look at estate planning, including associated tax implications.

Accounting Basics: “Death Duty” Fundamentals Quiz

### What is the primary purpose of death duty or estate duty? - [ ] To benefit the estate beneficiaries. - [x] To raise government revenue. - [ ] To discount the value of the estate. - [ ] To increase the wealth of the family. > **Explanation:** The primary purpose of death duty is to generate revenue for the government and prevent the excessive concentration of wealth by taxing substantial estates. ### Who is mainly responsible for paying the estate duty? - [x] The estate executor. - [ ] The state tax authority. - [ ] The deceased's beneficiaries. - [ ] The deceased's attorney. > **Explanation:** The estate executor or administrator is responsible for ensuring that the estate duty is calculated and paid from the estate before distribution to the beneficiaries. ### In the UK, what threshold exempt an estate from Inheritance Tax as of 2023? - [ ] £400,000 - [ ] £300,000 - [ ] £500,000 - [x] £325,000 > **Explanation:** In the UK, estates that are valued below £325,000 are exempt from paying Inheritance Tax as of 2023. ### Which of the following is commonly included in the estate duty calculation? - [ ] The deceased's credit card debt - [ ] The deceased's social security benefits - [x] The deceased's real estate properties - [ ] The deceased's unpaid taxes > **Explanation:** Real estate properties owned by the deceased are included in the estate duty calculation as part of the estate’s total value. ### How can gifting assets reduce the value subject to death duty? - [ ] It always results in a tax exemption. - [ ] It only works if done within a year of death. - [x] It reduces the taxable value of the estate. - [ ] It avoids probate entirely. > **Explanation:** Gifting assets before death can lower the value of the estate that is subject to death duty, though there are specific rules and limitations that apply. ### Before beneficiaries receive their share, what must the executor ensure? - [ ] All beneficiaries consent to the estate plan. - [x] The estate duty is paid. - [ ] The deceased's debts are voided. - [ ] The will is read to the public. > **Explanation:** The executor must ensure that all applicable estate duties and debts are paid before distributing the remaining elements of the estate to the beneficiaries. ### Can beneficiaries contest the valuation used in calculating estate duty? - [x] Yes, they can contest it with proof. - [ ] No, it is final once assessed. - [ ] Only if they are direct heirs. - [ ] Only within a year of death. > **Explanation:** Beneficiaries can contest the estate value calculation if they have substantial proof or an independent valuation to challenge the original assessment. ### What is "probate"? - [ ] A tax on inheritance. - [x] Legal validation of a will. - [ ] Transfer of wealth strategy. - [ ] A certification for estate planners. > **Explanation:** Probate is the legal process through which a deceased person’s will is validated, and their estate is distributed. ### Which tax is complementary to estate duty? - [ ] Capital gains tax - [x] Gift tax - [ ] Sales tax - [ ] Property tax > **Explanation:** Gift tax is often considered complementary to estate duty as both deal with the transfer of assets and can influence the taxable estate value. ### What is a taxable estate? - [ ] An estate exempt from all taxes. - [ ] The maximum value allowed without tax. - [x] Estate portion subject to taxation. - [ ] Valued estate less than the threshold. > **Explanation:** A taxable estate is the portion of an estate's value that remains after deductions and exemptions and is subject to estate taxes.

Thank you for deep-diving into the concept of death duty. Use this guide and quiz to enhance your understanding and prepare for relevant examinations.