At one time in American history, wealthy families with names such as Carnegie, Rockefeller and Vanderbilt controlled vast private fortunes. Whenever a senior Vanderbilt died, a younger Vanderbilt would immediately inherit his home and all the assets within. The federal and state governments could only tax whatever the estate chose to liquidate. In an effort to create a populist “share the wealth” policy, a progressive Congress decided to levy a new tax on anyone who inherited substantial property or other assets through a legal will, and the first inheritance tax was born.
In the United States, a state government collects an inheritance tax while the federal government collects an estate tax. Both work on roughly the same principle. Whenever an individual is named in a legal will as the recipient of assets from an estate, he or she may be liable for paying this tax to the state. This is not the same as taxes levied on the property itself, but due simply for the right to assume ownership. The inherited property is evaluated and, depending on its value and the inheritor’s relationship to the deceased, a tax may or may not be levied.
This is where the inheritance tax laws become very murky and controversial. Currently, this tax has more exceptions and exemptions than most other tax laws combined. First of all, the value of the property or monetary asset must exceed $1.5 million US Dollars (USD) in order to even qualify for the inheritance tax. This eliminates most inherited property immediately. “Class A” relatives, which include spouses, children, parents, and grandchildren, are also considered exempt. The worst case scenario would be for a favorite cousin to inherit his uncle’s $3.5 million USD mansion in the Hamptons. The cousin would face up to a 50% tax on the property, which would mean an instant debt of $1 million USD or more.
Some people refer to this as a “death tax,” but that is not an entirely accurate description. The taxes levied after an estate sale are for the value of the items sold — this would be considered a form of death tax. An inheritance tax is based on the value of an asset which may or may not be sold. The original intention of the law was to eventually reduce the wealth of robber barons and extremely rich private landowners.
Only a select number of citizens are affected by an inheritance tax, but it is still a highly-charged political issue. Other nations have eliminated or severely limited their own versions of the tax, but the United States government continues to keep some form of estate tax on the books. Eliminating it may help many of the country’s wealthiest citizens remain wealthy, but the general population has little to fear from an this tax law.