Inheritance taxes

When a person has inherited assets in heritance; a sizable portion is assessed of thus received assets and estate and the inheritance tax is calculated on this portion of the estate. This tax is pure and simple, strictly a state tax. If the said estate is duly transferred into the name of spouse, and in some cases this transfer has been effected in the names of children and also some of the close relatives, in that case i.e. in those transfers the property will be exempted from paying the inheritance tax.

There are also provisions where in if the transfer is made in the favor of some charitable institutions that will not attract any imposition of the inheritance tax. The inheritance tax needed to be paid in the event of death of an individual and he leaves behind assets for his heirs in heritance. In US the states which follow inheritance taxes at the state level are South Dakota and New Mexico. This tax is levied irrespective of the fact whether such transfer of estate is done through a will or state law of intestacy.

In the US the inheritance tax is one part of the unified gift and estate tax system and the other part is the gift tax.

Calculation of inheritance tax:

Gross value of the estate:

What will comprise the beginning step is the procedure of calculating the total tax amount on the estate. Gross estate is the total of all the property value of the decedent at the time of his/her death.

The following values which are not comprehensive are added to the above values :

  • If the surviving spouse has any property then such value of the estate so held
    • .
  • If the decedent had made any transfer of property 3 years prior to his death then such value is also taken into account
    • . But such transfers should not have been for sale for full value.
  • Value of transfer made for which certain powers has been retained by the decedent
    • .
  • In case of the recipient through ownership, then the value of such properties which he possesses only by surviving the decedent
    • .
  • If the reversionary interest retained by the decedent exceeds 5% of the value of the property then such value or values are added to the gross estate
    • .
  • The value of the property in case of revocable transfer
    • .
  • Value of certain annuities.
  • Transfers through operation of law or survivorship and the value of the property are held jointly
    • .
  • Value of powers of appointment
  • Value of certain life insurance policies proceeds
    • .

    Deductions:

    The allowable deductions from the gross value are:

  • Funeral expenses, administration expenses and estate claims
    • .
  • Certain contributions towards charitable organization
  • If any inheritance or estate tax has been paid to the states or districts of Columbia. This deduction has been started from the year 2005.

    • Tentative tax:

    Such tax base is the sum total of the taxable estate and the adjusted taxable gifts. The tentative tax is increased with an amount which equals 5% of the cumulative taxable transfers between $10,000,000 and $21,040,000. The tentative tax amount is reduced by the amount of gift tax. Such gift tax should have been paid according to the rates at the time of the death of the deceased.

    Credits against tax:

    A unified credit with respect to the sum of the taxable estate and the taxable gifts made during the life time of the deceased. The exclusion amount in case of person dying during 2006, 2007 or 2008 is $2,000,000. From the year 2009 the exemption will be $3,500,000.

    Basic requirements:

    The executor has to file returns and pay the tax due. But if any other person is responsible for managing the estate or the person in possession of the property of the deceased. A Form 706 has to be filed along with the return which should contain detailed information regarding the value of the estate and the exemptions if any claimed.

    Tax avoidance:

    In order to minimize the payment of the estate tax many tax planning options are available. The insurance companies provide financial planning services. These services guide the assesses to plan and minimize their estate tax liability. One technique is to combine the tax exemption of the husband and wife by creating a will or a living trust.

    Conclusion:

    Since inheritance tax has become a burden for many families especially in case the value of the property is above the nil rate specified in the inheritance tax table, it is better that the whole combined estate is created into a will or a living trust. The will thus drafted has to be signed in the presence of two independent witnesses.

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