death tax

noun
Updated on: 13 Oct 2017

Definition of death tax

:a tax arising on the transmission of property after the owner's death; especially :estate tax

First Known Use of death tax

1880


Financial Definition of DEATH TAX

death tax

What It Is

A death tax, also called an estate tax, is a tax assessed on all or a portion of an inherited estate. Life insurance, pensions, real estate, cars, belongings and debts are all part of one's estate. "Death tax" is generally a pejorative term.

How It Works

Death tax rates vary, and only the portion of an estate value above a certain threshold is taxed at rates as high as 50%. These "thresholds" often change yearly. Many states used to receive a portion of the estate taxes recovered by the federal government, but now many states levy their own estate taxes instead. Each state sets its own estate tax rates and exclusions.

Death taxes usually apply to assets inherited by heirs, but they usually don't apply to assets inherited by spouses. Death taxes on small businesses and farms left to heirs also face unique estate tax treatment.

Step-ups, which refer to an increase in the price at which an investment was purchased, reduce tax bills because the IRS pretends the original cost of an asset is the market value when you inherit the assets. Thus, heirs can sell those investments immediately and might pay little or no income tax.

Why It Matters

Part of estate planning is preparing for the taxes due upon one's death, and where one lives can have a significant impact on the amount of estate tax his or her heirs pay.

Death taxes are not the same as probate fees, which can also cost thousands of dollars. Settling an estate may also involve executor fees, court fees, recording fees and attorney fees. In many cases, death taxes and fees must be paid as the estate is probated, meaning that the heirs will need to come up with the money fairly immediately after a person's death. In many cases, the heirs either have to sell the assets they've inherited just to pay the taxes and fees, or they have to borrow money to do so.

Many people attempt to reduce the size of their estate while they're still alive by giving away portions of their estate. This can be done without triggering death taxes as long as the gifts are below the gift-tax exemption limit. Establishing a trust often reduces estate taxes because it allows a person to transfer legal title of his or her property to another person while he or she is still alive. It also gives the trustee (the person acting on behalf of the decedent) the authority to distribute assets immediately to the beneficiaries based on the terms of the trust. No court is involved, so there are no probate fees and no public record of the value of the estate. Many financial advisors urge clients to have trusts, especially those who live in states where probate fees are especially high or if the client owns a home or real estate. Trusts are not for everyone, however, so it is important to seek proper financial advice.


Law Dictionary

death tax

noun

legal Definition of death tax

:a tax assessed on the transfer of property (as an estate, inheritance, legacy, or succession) after the transferor's death — compare estate tax, generation-skipping transfer tax, gift tax

Learn More about death tax


Seen and Heard

What made you want to look up death tax? Please tell us where you read or heard it (including the quote, if possible).

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!

WORD OF THE DAY

serious difficulty or misfortune

Get Word of the Day daily email!

Test Your Vocabulary

The Exceptions Quiz III

  • one-green-toy-robot-amidst-many-red-toy-robots
  • Which of these words does not mean "nonsense"?
Name That Thing

Test your visual vocabulary with our 10-question challenge!

TAKE THE QUIZ
Bee Cubed

Test Your Knowledge - and learn some interesting things along the way.

TAKE THE QUIZ

Love words? Need even more definitions?

Subscribe to America's largest dictionary and get thousands more definitions and advanced search—ad free!