re: Inheritance tax

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Could someone explain inheritance tax to me like I'm 5?

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Inheritance tax is very rare, and estate taxes are even more rare.

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How are you taxed?

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Inheritance tax is a state level tax in a few states, that simply takes your inheritance, and applies a tax on it. Just like some states take your income, and apply a tax on it.

Estate tax is a federal level tax that is applied on the fair market value of assets above a (currently) pretty high value.

For every 10,000 people that die in the US, under current rules 7 will pay estate tax.

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When are you taxed if you receive?

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Inheritances that are subject to state tax generally are taxed when you are placed in possession. With the estate tax, it's 9 months (with an extension available) after death. There are provisions available to delay this tax as well, depending on the asset base.

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What's the logic of inheritance taxes?

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Government needs money? LOL. It has roots in the idea that appreciated assets should not be able to pass from generation to generation without being taxed. Basically, that there should be a time limit on how long appreciation can go untaxed.

A basic example... let's say in 1980 you purchased a number of shares of JPM stock, for a cost of $1M. Now, those shares are worth $50M. You've never sold any. You are single, you die, and you leave the stock to your sole son.

No estate tax (and no related step-up rules), your son now has stock with an untaxed unrealized gain of $49M. It can continue to grow, and he can continue to pass it down.

With estate tax, that $49M is taxed at your death. Your son gets a stepup in basis to $50M. So the appreciation is taxed earlier than it would otherwise be.