Death tax
As a good Citizen, every individual in the Society has to necessarily make some contribution towards the welfare of the Society and help the government in carry out its affairs. Some such contributions are Voluntary like being a part of Social activities; make oneself a Blue Cross member and so on . But there are certain forced duties that are created for easy functioning of the government. One such thing is Tax. A tax is a Compulsory payment by each individual to the government treasury as per rules designed. Generally tax paid will be a certain percentage of one ?s income, assets owned etc ?
There are various types of taxes such as :-
(a) Capital Gains Tax: - It is the tax levied on the profit obtained from the sale of assets.
(b) Sales Tax: - This is a tax on purchase of goods and services.
(c) Inheritance Tax : - A tax one has to pay when he/she inherits property of a dead person . Also called as fuchsia none repeat scroll 0% Death tax. Each beneficiary of the estate has to pay his/her own Inheritance tax.
(d) Estate Tax: - A tax levied on the entire estate of a dead person . This is different from Inheritance tax in the sense that Inheritance tax is Progressive (A progressive tax rate is one in which people in the higher income group pay higher taxed than those with people in the lower income group) and is based on the amount received by the heir, borne by the same but Estate tax is levied on the entire property of the dead person . The executor then files a Single Estate tax return and the heir ?s will be held liable only if the executor fails to file the same . Death Tax is the right to receive property while Estate tax is the right to transmit property . Estate tax taxes the personal representatives of the deceased while Death tax taxes the Beneficiaries of the estate.
(e) Transfer tax: - Tax that is to be paid on transfer of title.
Our point of focus is Death Tax . The Death tax rate depends on the value of property received by the heir and his/her relationship with the descendant. Since this is the last duty of a citizen towards his state, Death Tax is also called as Last twist of Taxman?s knife. Generally this death tax is due after nine months from the date of death (in U .S and six months in case of UK) and is payable in Cash. Immediately a Question rose in my mind- Is any exemption available in payment of Death tax like what we have when we normally file our tax returns. The answer is yes. One can avail an exemption limit up to $6, 25, 0000, after which tax rate is 37% and if the asset size is more than 3 million dollars, the rate is about 55%. In the UK, Death tax is payable only if the dead person ?s estate is worth more than GBP 3,00,000 (for the financial year 2007-08) and GBP 3,50,000 for the financial year 2010-2011. All the states levy either Death tax or Estate tax while some levy both .
In the United States there is a difference between Death Tax and Estate tax while in the UK there is no such difference. They are known by different names like Inheritance Tax, Death tax, Death duty . An alternate to both forms of taxes is the Gift Tax .
Death tax is not levied under the following cases :-
(i) When the estate passes on to the spouse and if both are domicile of the same country
(ii) Gifts made more than seven years prior to death are also exempt from this.
(iii) This death tax is not applicable if the property is passed on to the spouse/Charitable Organization.
Taxes on some assets like Land and Buildings can be paid in equal installments over a period of 10 years but interest will be charged on the accrued amount . Generally what happens after death is a person willing to take over the administration of dead person?s estate would apply to the court for a Probate . Probate means applying to the court for the right to deal with deceased person ?s estate. Probate will not be issued if Death tax is not paid at least partially.
Death tax can be paid in any one of the following ways :-
1) Through Cheques, Electronic transfers, Giro cheque from any Joint account where the deceased person was a account holder
2) From one?s own account and then claim from the estate
3) If the deceased person was a British Government stock holder, then this could be used to pay the tax
4) Can use the National Savings Investment held in the deceased name.
Once all the taxes have been paid including any interest accrued, one can apply for a Clearance Certificate endorsing payment of all taxes . For this one has to submit Form IHT30.
Following is the steps in calculation of the Estate tax:-
1) One has to find out the value of the Gross estate ? This is generally more than what is mentioned in the probate estate. Even Life insurance benefits, Bank accounts or financial instruments which are payable on death or at least transferable under law are also included in the gross estate even though they are not included in the probate.
2) Then deductions have to be determined such as funeral expenses, Charitable Contributions, Property left to the surviving spouse which are not taxed.
3) Then the tentative tax is calculated.
4) Even after all these, if the estate amount is larger than the exempted value, the executor pays the tax for which he/she has to fill Form 706 with the US government.
In the US, most states have their own taxation formula. That is some states comply with federal rules while some states still impose death tax under the state rule even though it is exempted under the federal jurisdiction.
Death
tax is difficult to calculate than Estate tax . In this the exact amount
received by each Beneficiary has to be ascertained which involves complex
calculations. The Death Tax traces its Origin during 1826 in
The government
spends nearly 65 Cents for every 1dollar of revenue received in collection and
in Compliance Cost of Death tax. Research Studies says that nearly 91% of
businesses in America
are family owned, that is they are either controlled thro Stock or management.
Now Death tax is hindering the growth of such family Business in America. 70% of businesses do not pass on to the
Second generation and 87% do not pass on to the third generation . Well I
really feel that it is a double taxation because these assets are already taxed
in the form of Income tax and Capital gain tax. In 1998, Death tax could generate a little over 1% of
government revenue . Another noteworthy tributary of the
Estate Tax charged in the United States is about 55% which is highest in the World and the effective rate (that is after Credits and exemption) is 44%. Next in the hierarchy comes Japan. There has been a mass appeal towards this repeal of Death Tax . The Center for Study of Taxation forecasts that if Gift, estate and GST were repealed in1971, then by 1991 there would be 2, 62,000 more Jobs, GDP would be higher by $46.3 billion and $398.6 billion more in Capital.
Now let us look at ways of avoiding Death tax.
There are many ways of avoiding this death tax like going for Insurance and so on. There are many Brokerage and financial planning firms which assist in estate planning so that tax against the same could be made as less as possible. One of most popular way of avoiding death tax is creating a living trust which paves way for tax exemption limits for both husband and wife. That is parents give money to their children to buy Life insurance on parents in the form of irrevocable Life Insurance trust .Life Insurance is free of cost and even if parents have very high net worth and cases where life insurance would also not cover, a charitable trust could be created for the remainder . This is how large sum is floated in charity, donations and investment. The investment is used to buy insurance while the principal amount is for charity when parents die . Also point to be noted is that the offsprings are able to reap the benefit of Insurance proceeds . So, Death tax in a way promotes charity. Other methods are not really tax avoiding but makes money liquid so that payment of death tax becomes easier.
Well there are varied views with regard to Death tax:-
Arguments in favor:-
1) Death tax which is based on Progressive taxation helps in preventing accumulation of wealth.
2) Death tax (Estate tax) is applicable only to estates of considerable size
3) This does not cast a negative effect on farmers as there is exemption built in law for family owned farms.
4) It encourages charity
5) Death tax is a better source of income than Income tax as it is demoralizing.
6) Allowing one to accumulate wealth without imposing any such restrictions will make the future generations reluctant to work hard.
7) If unlimited inheritance is allowed, they will tend to destabilize society.
Arguments against:-
1) Distribution of property, effective planning of the estate becomes difficult because of Estate tax. Because of pending estate taxes closes the door for further investments thereby reducing liquidity.
2) Not everyone is well equipped with Estate planning services. Some of them are not even aware of the consequences that people behind them would face if estate planning is not done properly. So even ignorance gives rise to unfair results .
3) The federal estate tax is higher than the amount being effectively transferred to the heirs. In order to transfer a property of worth USD 3 .5 million, one had to pay a estate tax of USD 9,40,000 million so that each beneficiary could get USD 1,280,000 million, the effective transfer rate tax being 36.7%. In the extreme cases where federal tax rates go up to 50%, the transfer rate tax is found to be 100%. So, people prefer paying Gift taxes on the transfer rather than being charged for the entire estate.
4) Death tax gives room for double and triple taxation. Double taxation occurs on earned income and once again capital gains tax is imposed on returns of earned income after they are reinvested in new ventures, stocks etc ...
But point to be noted is capital gains on those reinvested proceeds is not taxed before . So without estate tax, the alternative would be to treat the transfer of ownership of stock at death as a sale and levy capital gains tax on them .
Therefore Death tax has its own benefits and drawbacks . One has to make effective planning of his/her own estate in order to reap the benefits made by legislators.
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