Estate Tax Incidence – USA

Estate Tax Incidence – USA

What is Estate Tax?

Estate tax is a federal tax in the United States Of America (USA) imposed on the right to transfer property on the death of a person. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. Hence, Estate Tax is a tax on the transfer of the estate of a deceased person. The tax applies to property that is transferred via a will or according to state laws of intestacy.

The estate consists of everything a person owns or has an interest in at the time of his death. The gross value of estate is arrived at by including the fair market value of everything owned by the person at the time of his death, irrespective of its value at the time of acquisition.

The starting point in the calculation is the “gross estate.” Certain deductions from the “gross estate” are allowed to arrive at the “taxable estate.” The federal government allows certain exemptions from the gross value of estate to arrive at the taxable value of the estate. A deduction is allowed on transfer of assets to surviving spouse provided that the surviving spouse is a U.S. citizen.

In addition to the above, certain states also impose an Inheritance Tax on assets located in their jurisdiction. Also, state tax rules for determining residence do not necessarily parallel federal rules.

Who is liable to pay Estate Tax?

Estate tax is to be paid by the executors of your estate or person responsible for administering the estate. An estate tax return has to be filed within 9 months from date of death of the person. An extension of six months is available if requested prior to due date and the estimated amount of tax is paid by due date.

Is Estate Tax payable on assets located outside USA?

The domicile status of a person , for Estate Tax incidence is used to decide chargeable to estate tax. Refer Table below:

Sr. No.Status of personAssets chargeable to estate tax
1U.S. CitizenWorldwide assets
2US Resident (Greencard holder)Worldwide assets
3Non-resident Alien *US situs assets

* An alien is any individual who is not a U.S. citizen or U.S. national. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

US Situs Assets are:

Is Estate Tax payable in India?

According to the laws governing India, no estate tax or inheritance tax is payable on the death of a person.

Are bequests liable to pay estate tax?

In USA, bequests are not liable to pay estate tax since the estate tax is paid by the executor of the estate, after which the assets are distributed to the bequests.

If a USA citizen or green card holder inherits assets in India would Estate Tax be payable in USA?

For Estate Tax purposes all estate (gross assets) worldwide possessed by citizen of United States and US Resident are subject to Estate Tax in United States. Unfortunately, for Estate Tax purposes there is no tax treaty between US and India.

One school of thought is that Estate Tax is to be paid by the executors of the estate or person responsible for administering the estate and not necessarily by the recepient or beneficiary. However one needs to seek appropriate guidance and advise on the same from competant authority.

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