An inheritance tax is a tax on the estate of a deceased person. Some jurisdictions exempt certain types of estates or those below a certain value. Probate courts ensure taxes are paid and assets are distributed according to local laws. Intangible assets such as bank accounts are subject to inheritance tax, and rules may vary for residents and non-residents.
An inheritance tax is not an inheritance tax or inheritance tax. It is a tax that is levied in some jurisdictions on the estate of the deceased when a will is tested. Some localities do not impose an estate tax because the tax law is often a local or regional law and not a national law. Certain types of estates are exempt from an estate tax, and some estates that fall below a certain monetary value are automatically exempt. These values are codified in local and regional laws.
The estate of any deceased owner often goes through a judicial process called probate. The probate court ensures that taxes and creditors are paid and disperses the remaining estate and funds to the beneficiaries according to the will of the deceased. The court has a duty to distribute assets according to local laws when the deceased dies without a will. In jurisdictions where an estate tax is levied, the taxes must be paid before the probate process can be concluded in court, unless the estate or parts of it are exempt.
Not all estates or monetary funds are subject to an estate tax. For starters, insurance proceeds and obligations payable to a surviving spouse, children, or other beneficiary are exempt. The exception is when the intended beneficiary is the estate, owned by the deceased. Assets held jointly by the surviving spouse and the deceased, with survivor’s right, are also exempt from inheritance tax. Finally, the laws of various jurisdictions exempt property valued below a certain amount, such as $15,000 in the Commonwealth of Virginia.
Those wishing to obtain the right to administer the estate or act as executor of the will are often prohibited from doing so until the tax due has been paid. Even if the deceased named a person in his or her will to act as executor, that person must be authorized by an probate court. When there is evidence that a tax return has been filed and that tax has been paid at the prevailing tax rate, the court may grant administration rights.
Intangible assets are subject to inheritance tax. These include bank and brokerage accounts. Rules may vary for resident and non-resident deceased. For example, a deceased non-resident may be able to avoid taxes on stocks and other intangible assets, but a deceased resident may not. Assets often do not need to be in the jurisdiction to be subject to inheritance tax if the deceased is a resident. The person filing the probate tax return often has to account for properties located anywhere.
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