inheritance tax

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inheritance tax

broadly, a tax on wealth transfers i.e. gifts made in lifetime or on death. The main charge is on everything beneficially owned at death, including property in which the deceased had an INTEREST IN POSSESSION. To prevent deathbed gifts being used to avoid the tax, gifts made within seven years of death are also charged but are POTENTIALLY EXEMPT TRANSFERs (PET) in the meantime. However, some lifetime gifts are immediately chargeable if the assets are transferred into certain types of discretionary trust. Whilst within such trusts and on exiting them, the assets are liable to a special regime of inheritance tax. The territorial scope of the tax is determined by the domicile of the individual. Those who are domiciled in the UK are chargeable on their worldwide assets and those who are not on assets situated in the UK. The value chargeable may be reduced by AGRICULTURAL PROPERTY RELIEF or BUSINESS PROPERTY RELIEF. Exemptions can apply for small gifts, maintenance payments, wedding gifts, gifts to charities and national museums and certain other bodies. Some of these exemptions have monetary limits. There is a taxable threshold below which the rate is zero. Earlier gifts obtain the benefit of this threshold before later gifts. In determining the tax on the assets held at death, a deduction is allowed for funeral expenses and debts outstanding, including any unpaid taxes. The primary responsibility for paying the tax relating to a lifetime gift which has become chargeable falls upon the recipient. Tax payable on the estate of the deceased is primarily payable by the executors, except to the extent of any tax relating to property held in a trust in which the deceased had an interest in possession, which is payable from the assets of that trust. It is possible to vary an inheritance after the death if all the beneficiaries who would inherit less as a result of the change so agree. This can result in significant reductions in the inheritance tax liability. However, the variation must be made within two years of the death and the instrument of variation must state that it is to take effect for inheritance tax purposes. Any inheritance tax is calculated as if the variation was effectively backdated to the date of death. A similar provision can be applied for CAPITAL GAINS TAX.
References in periodicals archive ?
New York State's 2012 Nonresident Audit Guidelines provide primary and related factors for auditors to consider in determining whether taxpayers are domiciliaries of New York State for income tax purposes, which presumably would be the same factors considered in determining whether a taxpayer is a domiciliary in New York State for state estate tax.
Basically, New York's state estate tax is a "fixed" "soak up" tax meant to reap the maximum revenue benefits from the federal law, as of 1998.
While portability may also be a solution to this problem in some cases, without a separate election, decedents may be forced to incur state estate tax upon the death of the first spouse to die or "waste" a portion of their federal estate tax exemption.
State estate tax exemption amounts State 2015 estate tax threshold Connecticut $2,000,000 Delaware $5,430,000 District of Columbia $1,000,000 Hawaii $5,430,000 Illinois $4,000,000 Maine $2,000,000 Maryland $1,500,000 Massachusetts $1,000,000 Minnesota $1,400,000 New Jersey $675,000 New York $2,062,500 for deaths from April 1, 2014, through March 31,2015; $3,125,000 for deaths from April 1, 2015, through March 31,2016 Oregon $1,000,000 Rhode Island $1,500,000 Vermont $2,750,000 Washington $2,054,000
(11) In New York, for example, if the DS's estate files a federal estate tax return and elects portability, the estate is bound by the federal QTIP election for state estate tax purposes and, as a result, cannot utilize the state AEA.
Nevertheless, the existence of larger estate and GST exemptions, the availability of spousal portability, the potential applicability of state estate taxes, and the importance of the cost basis of property in light of increased capital gains rates on the decision to make gifts versus bequests, means that estate planning still requires planning for many complex interrelated factors.
It is also worth noting that the majority of states do not impose a gift tax, so lifetime gifting strategies can be particularly effective when attempting to reduce the amount subject to state estate taxes upon the client's death.
The state estate tax ramifications of electing a federal DSUEA are beyond the scope of this article.
* State Death Taxes--Florida practitioners and residents are generally less concerned with state estate taxes, because currently there is no state estate tax in Florida.
In a 45% combined federal and state estate tax bracket, this transfer can result in large estate tax savings over a period of time.
This study, which was commissioned to determine why Connecticut was losing its wealthiest retirees, also found that the state estate tax was the leading cause of out-migration, and that the average estate of those leaving was $7.5 million.

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