What is an Estate Tax?
An estate tax is levied on assets inherited by the heirs to a deceased person's estate.
How Does an Estate Tax Work?
The estate tax is applied differently according to U.S. Federal and state laws as well as international law. Typically, estate taxes are only levied once a certain threshold, known as the exclusion limit, has been reached.
Estate taxes are not applicable if a person bequeaths (transfers) the assets from the estate to a living spouse. This type of transfer is known as the unlimited marital deduction. However, in the event that the spouse dies, the beneficiaries may be required to pay estate taxes if the exclusion limit is exceeded.
Why Does an Estate Tax Matter?
Estate taxes, like other taxes on unearned incomes, are a source of revenue for governments that use it to finance various projects. The issue of the estate tax has become highly politicized, and it is sometimes referred to as the 'death tax' by people who oppose it.
But estate taxes are not inevitable. In the U.S., there are many different estate planning techniques that individuals can use to reduce the size of their taxable estates.
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