Estate Tax Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Estate Tax, written in plain English, along with examples of how it is used.
What is Estate Tax?
n. generally a federal tax on the transfer of a dead person’s assets to his heirs and beneficiaries. Although a transfer tax, it is based on the amount in the decedent’s estate (including distribution from a trust at the death) and can include insurance proceeds. Currently such federal taxation applies to the amount of an estate above $600,000, or as much as double that amount if the estate is distributed to a spouse. Some states have an estate tax, more commonly called an inheritance tax.
History and Meaning of Estate Tax
Estate tax is a federal tax levied on the transfer of a deceased individual's property to the lawful heirs and beneficiaries. The tax is based on the value of the property included in the decedent's estate, and it covers estates exceeding a certain threshold. The threshold for the estate tax changes periodically- the exception being the 2017 Tax Cuts and Jobs Act, which raised it to $11.58 million. Currently, estates worth over $11.7 million are subject to the tax. In some states, the tax is referred to as an inheritance tax.
Estate tax originated in Ancient Rome, introduced to pay for wars. In America, one of the first estate taxes was introduced during the U.S. Civil War in 1862 to fund the war. Tax reform in 1916 established the modern estate tax. The tax has often been a subject of public debate, with supporters favoring it as a means of reducing income inequality by "taxing the rich," and critics seeing it as an unfair punishment that discourages economic growth and innovation.
Examples of Estate Tax
- When Mary's father passed away, she inherited $20 million worth of estates including properties, investments, and asset holdings. Since the total amount exceeded the $11.7 million threshold, the estate was subject to tax.
- Jack inherited $8 million from his uncle who died in 2020. Since Jack's inheritance was below the federal threshold, he didn't have to pay estate tax to the government.
- Dr. Phillips passed away and left behind $7 million of assets to his children. The estate is subject to estate tax because it exceeds the current estate tax threshold.
Legal Terms Similar to Estate Tax
- Inheritance tax: A state tax levied on the assets inherited by a close relative from a deceased person.
- Gift tax: A tax levied by the IRS on any transfer of money or property to another individual or entity that doesn't come in the form of compensation.
- Estate planning: The process of strategically managing one's assets for proper distribution after death.