November 14, 2012

Estate, Inheritance or Death tax?

The estate, tax and death merge as one just as the Ohio and Kanawha Rivers

When a U.S. citizen or permanent resident passes away, the federal and state government may impose a tax, when applicable, on the estate of the deceased person. The correct legal term for this is the "estate tax." Depending on when the person passed away and the size of their estate, will dictate if the estate tax is imposed.

On a daily basis I check Google Analytics to see how Internet users found my blog. One of my particular interests is to look at the keywords used to find my blog. What I find particularly interesting is that people often search the term "California inheritance tax", "is there is an inheritance tax in California" or "does California have a death tax."

The point of this post is to make clear that the following terms: (1) estate tax, (2) inheritance tax and (3) death tax, all have the same meaning. These three terms all relate to the tax imposed on a decedent's estate by the federal or applicable state government. I have never heard of a municipality, i.e. a city, imposing a tax on a decedent's estate. 

Many people ask me about the estate tax, although they use the term "inheritance tax" typically. I explain what it is and then they ask if the estate tax is different from the inheritance tax. As mentioned, there is no difference between the terms. So if you invoke the inheritance tax, you are also alluding to the estate tax as well. One could say that all roads lead to Rome when the phrase (1) estate tax, (2) inheritance tax or (3) death tax is mentioned.

Similarly, many people have heard of the term "living trusts." This is another informal legal term that has supplanted the formal legal term. If a trust is created during a person's lifetime, this is known as an "inter vivos" trust (Latin for among the living). Since the term "living trust" is more easily comprehensible than "inter vivos trust," (trust me on this one) the former is used instead of the latter. For reference, if a trust is created at death, this is known as a testamentary trust. A trust is created at death commonly through a will. For example, the 1951 will of newspaper tycoon William Randolph Hearst created a massive trust than is expected to sustain until 2040. Hearst v. Ganzi (2006) 145 CA4th 1195.