Inheritance tax, also referred to as death tax or estate tax, is a tax that is normally paid on an estate when a person passes away. Many estates are exempt from paying estate tax because they are valued less than the threshold. The threshold is the amount of money that someone's estate must be worth in order for someone to have to pay inheritance tax for it.
Usually, the personal representative or executor pays the tax using the money from the deceased's estate. Every now and then, someone who had received a gift from the will of the person that died or inherited from them has to pay inheritance tax.
To find out if an inheritance tax is due on an estate, you must add up all possessions in the estate--plus all money and investments--and add that to the value of the estate itself. Then you must subtract the amount of money that deceased had owed, including any bills and funeral costs. Make sure that when adding up these values, the value of any shared assets between the deceased and another person are included. Anything held in trust also needs to be included in the total. You then take the difference of the net value of the estate and the threshold, and multiply that with the rate that you must pay for inheritance tax.
For example, say Mrs. Smith passed away, leaving all her assets to her oldest son. The minimum amount of money someone's estate had to be worth in order for the son to have to pay estate tax was $350,000. The rate of inheritance tax that they had to pay was 35%. The value of all of her assets including the house, car, personal items, bank account, and bonds was $370,000. The money that Mrs. Smith owed totaled was $3,000. So the net value of Mrs. Smith's estate would be $367,000. This amount is higher than the threshold, so an inheritance tax must be paid. The difference between the net value of her estate and the threshold is $17,000. The rate is 40%, so the total amount that Mrs. Smith's son would owe would be $6,800.
Many taxpayers don't like the idea of having to pay inheritance tax. Of course, if the estate of the deceased values less than the threshold, they don't have to worry about paying the tax but for many others, it is a hassle and some will try to avoid it at all costs.