Definition
The estate tax is a government levy imposed on the fair market value of property transferred from a deceased individual to their heirs. The valuation includes all assets owned by the decedent at the time of death, such as real estate, personal property, financial investments, and business interests, minus any debts and liabilities. Relevant laws, including the federal estate tax and gift tax, have been unified to apply one credit amount to the total lifetime and death-time property transfer.
Examples
Individual Estate: Suppose a decedent leaves behind property worth $5 million with no liabilities. The government’s estate tax would be calculated based on this $5 million value, minus any applicable exemptions and credits.
Combined Estate and Gift: An individual gifts $2 million during their lifetime and leaves $4 million of property upon death. The unified federal estate and gift tax credit will be applied to the sum of $6 million.
FAQs
What is the difference between estate tax and inheritance tax?
- Estate Tax: Levied on the deceased’s estate before distribution to heirs.
- Inheritance Tax: Imposed on the beneficiaries receiving the assets.
Does every estate have to pay the estate tax?
No, estate tax is only applicable if the value of the estate exceeds federal and/or state exemption thresholds.
How is the estate tax calculated?
Estate tax is calculated based on the fair market value of the estate at death, minus any liabilities, exemptions, and applicable credits.
What are common exemptions and deductions in estate tax?
Common exemptions include the marital deduction (property passed to a surviving spouse), charitable deductions, and a federal exemption amount which may vary year-to-year.
Who is responsible for paying the estate tax?
The executor or administrator of the estate is responsible for filing the estate tax return and paying any due taxes from the estate’s assets.
Related Terms
- Fair Market Value: The price at which an asset would sell in an open and competitive market.
- Federal Estate Tax: A tax imposed by the federal government on the transfer of the taxable estate of a deceased person.
- Gift Tax: A tax on transferring property by one individual to another while receiving nothing, or less than fair market value, in return.
- Unified Credit: A tax credit that reduces or eliminates the estate tax or gift tax for an individual.
References
Suggested Books
- “Estate and Trust Administration For Dummies” by Margaret Atkins Munro
- “Make Your Own Living Trust” by Denis Clifford
- “Estate Planning Basics” by Denis Clifford
Fundamentals of Estate Tax: Taxation Basics Quiz
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