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The US federal and state governments collect estate and inheritance taxes respectively, with exemptions for spouses, children, parents, and grandchildren. The inheritance tax has more exceptions and exemptions than most other tax laws combined, and only affects a select number of citizens.
At one point in American history, wealthy families with names like Carnegie, Rockefeller, and Vanderbilt controlled vast private fortunes. Whenever an older Vanderbilt passed away, a younger Vanderbilt would immediately inherit the home and all the assets within it. The federal and state governments could only tax what the estate decided to liquidate. In an effort to create a populist “share the wealth” policy, a progressive Congress decided to impose a new tax on anyone who inherited substantial property or other assets through a legal will, and the first estate tax was born.
In the United States, a state government collects an inheritance tax while the federal government collects an estate tax. Both work on roughly the same principle. Any time an individual is named in a legal will as the recipient of assets from an estate, he or she may be responsible for paying this tax to the state. This is not the same as the taxes collected on the property itself, but is simply due to the right to assume ownership. Inherited property is assessed, and depending on its value and the heir’s relationship to the deceased, a tax may or may not apply.
This is where inheritance tax laws get very murky and controversial. Currently, this tax has more exceptions and exemptions than most other tax laws combined. First of all, the value of the property or monetary asset must exceed $1.5 million United States Dollars (USD) to even qualify for inheritance tax. This removes most of the inherited properties immediately. “Class A” relatives, which include spouses, children, parents, and grandchildren, are also considered exempt. The worst case scenario would be a favorite cousin inheriting her uncle’s $3.5 million mansion in the Hamptons. The cousin would face up to 50% property tax, which would mean instant debt of $1 million dollars or more.
Some people refer to this as a “death tax,” but that’s not a completely accurate description. Taxes collected after a sale of goods are for the value of the items sold; this would be considered a form of death tax. An inheritance tax is based on the value of an asset that may or may not be sold. The original intent of the law was to eventually reduce the wealth of robber barons and extremely wealthy private landowners.
Only a select number of citizens are affected by an inheritance tax, but it remains a highly charged political issue. Other nations have eliminated or severely limited their own versions of the tax, but the United States government continues to keep some form of estate tax on the books. Removing it may help many of the country’s wealthiest citizens to stay wealthy, but the general population has little to fear from this tax law.
Smart Asset.
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