Inheritance tax is imposed on individuals who receive money, property or possessions from someone who has died. The amount of tax imposed is determined by the appraised value of the inheritance and the recipient's relationship to the deceased.
In actuality, inheritance tax isn't charged on decedent's assets, but rather for the right to assume ownership of the property. Estate tax is regulated by each individual state. At present, 10 of the 50 states within the U.S. impose inheritance tax. These include: Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee.
Inheritance tax is not imposed on money or property passed to the surviving spouse. Estate taxes are imposed when inheritance property is passed to children, family members, or friends. Tax rates and allowable deductions are based on family lineage. For instance, if a parent passes part of their estate to their children and part to their siblings, the children are taxed at a lower rate than the siblings.
For those who reside in states which impose estate taxes, the estate executor is required to file inheritance tax returns through the Internal Revenue Service (IRS). Inheritance property must be appraised to determine its value. A detailed list of outstanding debts owed by the decedent must be documented. This information is then used to determine the gross value of the estate.
Outstanding debts and taxes must be paid from the estate before inheritance money or property can be distributed to heirs and beneficiaries. Funeral expenses and estate administration fees are allowable deductions. After expenses are paid, tax is imposed on the net value of the estate.
Administrators are required to file inheritance tax returns within nine months from the date of decedent's death. A copy of the tax return must be provided to the probate court before a judge signs off on estate settlement.
Inheritance taxes must be paid in full at the time the return is filed. If the estate executor is unable to pay the inheritance tax in full, an extension can be filed. However, the balance due is subject to interest fees and late penalties.
Inheritance laws are complex and confusing; particularly with larger estates. Many states adhere to federal estate tax law, while others operate independently from it. Some states do not charge inheritance tax unless the estate is subject to federal tax. Therefore, it's important to consult with a probate attorney to understand what, if any, inheritance laws are applicable.