2.1.1 Inheritance and estate taxes

States imposing a transfer tax upon death levy either an inheritance or an estate tax. These taxes are the most common ones among the states. Civil law states usually levy an inheritance tax, which is an acquisition-based transfer tax applicable to the share of the inherited property received by each beneficiary (and, thus, not on the estate as a whole). Its taxable event is the enrichment of the beneficiary upon the deceased’s death and the taxable person is each beneficiary who receives the inheritance.1

The inheritance tax rates reflect, to a large extent, the state’s overall conception of succession.2 In the majority of states, the tax rates are progressive and often depend on the size of the inherited property for each beneficiary and the degree of kinship between the deceased and the beneficiary.3 As a rule of thumb, the higher the amount of the mortis causa transferred property, the higher the applicable tax rate. Furthermore, the closer the kinship between the deceased and the beneficiary, the lower the applicable tax rate.4

On the contrary, the taxable event of the estate tax is the mortis causa transfer of property, in which case the deceased’s entire estate (or sometimes the deceased) is regarded as the taxable person.5 As a result, the estate as a whole, rather than the property received by each particular beneficiary, becomes the point of departure.6^, 7^, 8 Moreover, the estate is often treated as a legal person under both domestic and tax treaty law and the tax is often determined based on progressive tax rates that depend on the size of the estate and usually the degree of kinship between the deceased and the beneficiaries. With regard to this point, Van Vijfeijken (2006) noted that the introduction of elements “looking at” the degree of kinship between the deceased and the beneficiaries have altered the nature of the otherwise “impersonal” estate tax, which initially focused on the mere transfer of property from the deceased to the beneficiaries.9 Finally, since estate tax is levied on the entire estate, it includes the money used to pay the tax, in comparison to inheritance tax.10^, 11

States levying inheritance and estates taxes usually provide for subjective and objective tax exemptions12 and/or tax-free allowances. In most states, the subjective tax exemptions refer to the surviving spouse or the children and thus follow the kinship between the parties involved. On the other hand, the objective tax exemptions are numerous and find their origins in several different policy reasons (e.g. social, environmental and cultural reasons).13 I note that those exemptions are often territorial and are not only granted in cases where the deceased and the beneficiaries share a degree of kinship.

It is not only the exemptions that vary considerably from state to state, but also the property valuation rules. Most inheritance and estate tax laws provide for a general principle of market value, but several exemptions exist (e.g. the cadastral value or even the market value after death).14 Furthermore, some states apply the same valuation rules for income/capital and death tax purposes.

On the contrary, rules on debt deductions show similarities in many states where tax debts of the deceased are deductible, along with the costs incurred after death (in principle, funeral expenses and probate or notary fees related to the inheritance proceedings). Moreover, some states provide an apportionment of liabilities and costs between the taxable and non-taxable shares of the property because, for example, some assets are not included in the tax base. This is because either an exemption applies to these assets or some assets are excluded from the jurisdictional scope of the applicable inheritance or estate tax legislation.15