Q:

What is an estate tax?

A:

Quick Answer

The IRS states that an estate tax is a tax that is levied on the right to transfer property upon your death. Simply put, if your estate exceeds a certain amount of wealth at your death, the property is taxed before it is passed on to your heirs.

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Full Answer

The estate tax is only applicable to the wealthiest of estates, because the high exemption amount of $5.43 million per person in 2015 means that 99.8 percent of estates owe no tax at all. The Center on Budget ad Policy Priorities estimates that roughly only 2 out of every 1000 estates face a tax levy for 2015. This is a way to tax the very high inheritances of a small group of wealthy heirs who otherwise would not be taxed much on their large wealth.

Although eligible estates are required by law to provide estate tax, estates often use teams of lawyers and accountants to exploit loopholes in the estate tax that allows them to pass portions of their estates tax free, explains the CBPP. One such loophole is the use of grantor retained annuity trusts, known as GRATs. The estate owner typically invests stock in a treasury fund designed to repay the estate the initial amount plus interest at a rate set by the treasury, usually over two years. If the value of the stock increases higher than the treasury rate, the gain goes to the heir tax-free. If the stock doesn't rise, the full amount of investment still returns to the estate.

Thanks to quickly rising stock, the GRAT loophole has enabled estates to avoid paying as much as $100 billion in estate taxes since the year 2000, states the CBPP.

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