What are Inheritance Tax Laws?

Daphne Mallory

Inheritance tax laws require individuals and organizations that are the recipients of real estate and personal property bequeathed to them in a will or given to them in accordance with regional laws to pay taxes. Inheritance taxes are not the same as estate taxes, in which the estate itself is taxed and must be paid prior to any transfer of assets. Varying tax rates are often applicable within the same jurisdiction, depending on the relationship of the person who inherits the property and the decedent. Children are often taxed at a lower tax rate, for example. Some regional and national laws allow some individuals to be exempt from inheritance tax laws, as in the case of a surviving spouse.

Regional and national laws may allow a surviving spouse to be exempt from inheritance tax laws.
Regional and national laws may allow a surviving spouse to be exempt from inheritance tax laws.

Inheritance tax laws are considered a tax on the right of succession. It is not considered a form of property tax under most regional and national laws. When the appropriate taxes are not paid, the person who inherited the property did not obtain a right of succession. That property is then subject to collection, or the region may go after personal assets to pay the tax debt. Estate tax laws, on the other hand, are often a taxation on the right to transfer property.

Many regions do not have any inheritance tax laws. These jurisdictions often have estate tax laws, but many places are phasing out those laws as well. There aren’t uniform inheritance tax laws, unless those tax laws are a part of a national tax code. The laws for each region vary, with some jurisdictions offering higher or lower tax rates to residents of the same region for specified individuals. For example, the child of the decedent may be exempt from taxes altogether, or he might pay a much lower rate than what the uncle of a decedent would have to pay.

One way to avoid taxes imposed by inheritance tax laws is to be the legal resident of a jurisdiction that doesn’t have any. Individuals who want to limit the tax liability of those receiving their gifts after death can choose to grant gifts instead of leaving a larger inheritance. Other forms of taxes may apply, but the tax rates, deductions and exemptions may be lower than what would be owed according to inheritance tax laws. There is often a limitation on the amount of gift that can be transferred annually without triggering estate tax rates. Monies paid for certain services, such as medical bills, may also be transferred without limitation and without owing estate taxes.

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