Difference between Estate Tax and Inheritance Tax

The federal estate tax is a tax at death for the privilege of giving and receiving wealth on the amount of the estate (if any) that exceeds the exemption. The tax, if not paid to the Internal Revenue Service within 9 months of the person’s death, bears interest and in some cases penalties. The inheritance tax is a similar tax, but it is imposed by the state in which the person who died resided, and in some cases by the state in which the person who died owned real property.

Some states have abolished their inheritance tax and others have retained their inheritance tax. California initially abolished its inheritance tax, but retained something called the’pick-up tax.’ This tax was the dollar amount that the Internal Revenue Code allowed as a deduction on the federal estate tax return for state inheritance taxes paid.

The Internal Revenue Code was subsequently amended to remove the credit for state inheritance taxes paid. At that point, the last remaining part of the California inheritance tax went away. This was also true of other states which only had a pick-up tax. But a person may die a resident of California and own real property located in other states. The trustee if the asset was titled in the revocable trust or the executor if the asset was left out of the trust must determine whether or not that other state imposes an inheritance tax.

Even if an estate is not large enough to owe a federal estate tax, there may still be a state inheritance tax owing because states can compute their inheritance tax as they desire and they are not obligated to grant their residents or persons owning property in their states the same exemption that the Internal Revenue Code allows for federal estate tax purposes.


About randyspiro

I am a super lawyer in California with dual specialization in Estate Planning and Taxation.
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