1-via a gap tax
2-via a direct estate tax
3-via an inheritance tax
This article will focus on the inheritance tax. An inheritance tax is a tax on the right of a beneficiary to receive property from a decedent.
As a brief historical introduction, Congress created a wealth transfer tax during the Civil War with an enactment of an inheritance tax. It was repealed shortly after the war. In 1916, Congress passed an estate tax with rates ranging from 1 to 10%.
About sixteen states receive their death tax from the value of property that passes on to beneficiaries. This tax is calculated on the share that each person receives. All beneficiaries are categorized by various classes. The higher the class, the higher the amount of exemption from taxes that they receive. Conversely, the more distant a relative is, the greater the tax rate and the lower the tax exemption.
Therefore, the decedent’s closest relatives or blood relatives would be taxed at the lowest rate. As an example of a state’s beneficiary classification, in Class A, spouses are at the top of the list, followed by natural, legal, or informally adopted children under age 18. Next would come natural or adoptive ancestors, lineal natural adoptive or informally adoptive descendents.
Class B beneficiaries would include brothers, sisters, their descendants, wives, husbands, daughter-in-laws, or son-in-laws.
Class C beneficiaries include all other persons.
The tax rates depend on the value of the inherited property and the classification of the beneficiaries. And the tax rate varies depending on the state of domicile.