What is an inheritance tax?

At one point in American history, wealthy families with names like Carnegie, Rockefeller and Vanderbilt controlled vast private fortunes. Whenever an older Vanderbilt passed away, a younger Vanderbilt would immediately inherit his house and all the assets within it. The federal and state governments could only tax what the estate chose to liquidate. In an effort to create a populist policy of "sharing the wealth", a progressive Congress decided to impose a new tax on anyone who inherited substantial property or other assets through a legal will, and the first inheritance tax was born.

In the United States, a state government collects an inheritance tax, while the federal government collects an estate tax. Both work on approximately the same principle. Whenever an individual is named in a legal will as the recipient of real estate assets, he or she may be liable to pay that tax to the state. This is not the same as taxes levied on the property itself, but simply by the right to take possession. Inherited assets are valued and, depending on their value and the relationship of the heir to the deceased, tax may or may not apply.

This is where inheritance tax laws get very murky and controversial. This tax currently has more exceptions and exemptions than most other tax laws combined. First, the value of the property or monetary asset must exceed $1.5 million United States Dollars (USD) to qualify for inheritance tax. This removes most inherited properties right away. "Class A" relatives, which include spouses, children, parents and grandchildren, are also considered exempt. The worst-case scenario would be a favorite cousin inheriting his uncle's $3.5 million mansion in the Hamptons. The cousin would face a property tax of up to 50%, which would mean instant debt of $1 million or more.

Some people refer to this as a "death tax", but that's not a completely accurate description. Taxes levied after the sale of goods are levied on the value of the items sold; this would be considered a form of death tax. An inheritance tax is based on the value of an asset that may or may not be sold. The original intent of the act was to eventually reduce the wealth of extremely wealthy robber barons and private landowners.

Only a select number of citizens are affected by an inheritance tax, but it remains a highly charged political issue. Other nations have eliminated or severely limited their own versions of the tax, but the US government continues to keep some form of real estate tax on the books. Removing it could help many of the country's wealthiest citizens stay wealthy, but the general population has little to fear from this tax law.