Very few of us realize but when our parents pass away or any one else who leaves anything to us as part of their estate when they pass away, the receiving person has to pay an inheritance tax. Some people refer to the inheritance tax as the estate tax but they are two different things. One is a tax paid to the federal government and the second is paid to the state.
When someone lives and they leave behind some property, cash, and debt, the person assign as the executor of their estate figures out the total value of their estate and then uses those assets to pay off the deceased debts. Whatever is left over is consider the net value of the estate. Before the money is then passed on to designated heirs, the federal government taxes the estate at the rate of 35% (estate tax). After the tax is paid the remaining portion of the estate goes to the heirs.
When the heirs receive the property, they are taxed by their state an inheritance tax. The inheritance tax varies based on the state that you reside in.
But there is no estate tax or inheritance tax if the estate goes to the spouse of the decease. This is considered a tax exemption. If the estate is passed on to the deceased’s children, friend, or family then the tax is applied.
There is also one other important federal exempt that applies that is very important. The federal government currently set a estate exemption of $5 million for individual and $10 million for a couple. So if the estate total value is less than $5 million for a deceased individual or $10 million for a couple then no estate tax will be imposed on the estate.
That is why it is very important that if your estate is worth a lot of money then you want to make sure to keep the value of the estate below the federal exemption levels to pass as much as possible to your kids.