Inheritance taxes are controversial, because many people believe that it is morally wrong to tax people on the money they inherit from deceased family members. These taxes do provide an important revenue stream to the government, but in the United States, a distinction must be made between inheritance taxes and estate taxes. Essentially, there is not an inheritance tax at the federal level in the United States; however, there are estate taxes.
Inheritence Taxes and Estate Taxes
The federal government handles estate taxes. A number of states also levy inheritance taxes that are not connected to federal estate taxes. In the U.S. context, estate taxes are paid by legal representatives of the person who has died, such as the executor of a will, while inheritance taxes are paid by the beneficiaries of a deceased person's estate, or heirs.
The inheritance tax rate depends on the heir's relationship to the person who has died. States determine these rate on their own, and sometimes take into account the actual market value of a piece of property that is being given to an heir. The fair market value of a piece of property refers to what it could be sold for, not the cost to replace a particular asset. Tax rates vary from state to state, so it's important to find an estate planner who knows your tax jurisdiction's laws and can offer appropriate advice. Federal estate tax rates, on the other hand, are determined by the size of the estate. Larger estates command larger tax bills.
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Heirs can get tax exemptions for taxes that were paid on a piece of property before a person died. Any part of an estate that is given to charity is also exempt from tax. Before attempting to determine such exemptions, heirs should consult a qualified estate planner for advice. One common method of avoiding inheritance taxes is to put money into a trust and have a trustee shift the assets to the beneficiaries of an estate. There are a number of other different strategies that an estate planner can suggest to beneficiaries seeking to reduce their tax burden.