Estate Tax

Estate tax is calculated on the net value of everything a person leaves behind, after debts and allowable deductions. In systems that use it, there is usually a large exemption, so only estates above a certain value pay any tax.

For example, under a hypothetical system with an exemption of 5 million and a tax rate of 40% on the excess, an estate worth 6 million would owe tax on 1 million, or 400,000. Estates below 5 million would owe nothing.

The term is most associated with the United States, which has a federal estate tax, and some US states have their own. Many other countries use an inheritance tax instead, which is charged on what each heir receives rather than on the estate as a whole, and rates often depend on the heir's relationship to the deceased. Some countries have no tax on death at all.

Estate taxes are often reduced through planning, such as gifts during life, transfers to a spouse, charitable donations and trusts. Because rules, rates and exemptions change frequently and vary widely, current local rules should always be checked.