How Inheritance Tax Works

By: Ed Grabianowski & John Barrymore

If you're in line to inherit this, get prepared to write out a big check to the government before you claim the deed. See more home design pictures.
Tim Graham/Getty Images

Benjamin Franklin once wrote, "In this world nothing can be said to be certain, except death and taxes." It's an old, sardonic aphorism that nevertheless is universally true. One delightful area of tax law manages to combine both death and taxes into a single experience: inheritance tax.

In fact, what happens to your money when you die seems to be the source of quite a few old saws: "They get you coming and going," and "You can't take it with you," among others. What it all boils down to is pretty straightforward: When you die, you leave your money, your home, your possessions and other things of material value behind. You'll pass them down to your children, to other family members or friends, or to charity. And one way or another, the government will take its share.


In practice, of course, nothing is as simple as that. The property of the deceased might be subject to inheritance tax, estate tax, state and federal tax statutes, and a host of exemptions that can put more money in the pockets of the heirs. Because inheritance and estate taxes (sometimes known as "death taxes") are generally seen as a tax on the rich, these tax laws also get batted around as political footballs from time to time. In fact, President Obama signed a law changing federal estate taxes in 2010, and there are likely more changes to come.

If you're interested in planning ahead for that inevitable day when you or a loved one passes away, you've come to the right place. In this article, we'll explain the difference between inheritance and estate tax, how to avoid as much of those taxes as legally possible, and what the actual rates are for those taxes.