Inheritance Tax
A famous saying goes: “Two things are certain in life – death and taxes”. This could not be more applicable for inheritance tax. An inheritance tax is imposed on heirs of a deceased for the privilege of receiving property from him upon his death. This tax is distinguishable from an estate tax which is imposed on the estate of a deceased for the privilege of bequeathing property upon death. Some states in the United States impose their own, distinct inheritance tax apart from the Federal inheritance tax. Many people believe this tax is the most unfair tax because it reduces the value of property that an heir receives, below the level that the decedent intended to bequeath to his heir.
Estates up to a certain limit are exempt from Federal inheritance tax. In this way, the tax targets the wealthier individual and poorer individuals are protected. Some states also provide for tax exemptions. There are those states that provide the same exemption as the Federal one and there are those that provide a different level. This means that an heir may find himself exempt from both Federal and State inheritance tax. Alternatively, he may have to pay a Federal tax but not a State tax or a State tax but not a Federal tax. The worst scenario would be that he is subject to both a Federal and a State inheritance tax.
Individuals, aware of the existence of inheritance taxes, naturally look for ways to avoid them. A person who believes that his end is approaching may, therefore, think he can outwit the tax authorities by giving away his property before his death. In order to prevent this loophole, the Federal government invented another tax for “gifts made in contemplation of death.” If a gift meets the requirements of a gift made in contemplation of death, the value of the gift is added to the value of the decedent’s estate and the inheritance tax is calculated accordingly.
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