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Houston Estate Planning and Probate Blog

Tuesday, September 6, 2016

What is an Estate Tax?

While the terms "estate tax" and "inheritance tax" are often used interchangeably, they are not synonymous. Let's try to clarify the difference.

The main difference between estate taxes and inheritance taxes is who pays the tax. The clue is in the name.  Estate taxes are paid by the deceased person’s estate before the money is distributed to their heirs.  Inheritance taxes are paid by the person inheriting the money or assets.

Estate Tax

Estate tax is based on the net value of the deceased owner's property, and it is paid from the deceased’s estate.  An estate tax is applied to these assets when they are transferred to the beneficiary. It is important to remember that an estate tax doesn't have anything to do with the beneficiary or that person's resources.

Federal estate tax only affects individuals who die with more than $5.45 million (in 2016) in assets and individuals with such large estates can leave up to that amount to their beneficiaries without being subjected to a tax liability. A vast majority of the population will not owe federal estate tax upon their death.

In most circumstances, no federal estate tax is levied against spouses. As of the Supreme Court's recent ruling, this includes gay married couples as well as heterosexual couples. Federal estate taxes can, however, be charged if the spouse who is the beneficiary is not a citizen of the U.S. In such cases, though, a personal estate tax exemption can be used.  Even where remaining spouses have no liability for federal estate tax, they may be charged with state taxes in some states, taxes which cannot be avoided unless the couple relocates.

Inheritance Tax

Inheritance tax, as distinguished from estate tax, is imposed by some state governments and the tax rate depends on the person receiving the property, and, in some locations, on how much that person receives. In some states, inheritance tax can also vary depending upon the relationship between the testator and the beneficiary.

Texas however, does not have such an Inheritance Tax or a state estate tax. Residents of Texas are only subject to one tax, the federal Estate Tax.


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