Estate Tax

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DEFINITION of 'Estate Tax'

A tax levied on an heir's inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law. The estate tax is mostly imposed on assets left to heirs, but it does not apply to the transfer of assets to a surviving spouse. The right of spouses to leave any amount to one another is known as the "unlimited marital deduction."

BREAKING DOWN 'Estate Tax'

When the surviving spouse who inherited an estate dies, the beneficiaries may then owe estate taxes if the estate exceeds the exclusion limit. Because the estate tax can be quite high, careful estate planning is advisable.

In 1997, a change in U.S. laws increased the value of assets that a beneficiary may exclude from federal estate taxes - though many states have their own estate taxes. With this change of laws, small business owners became able to pass on farms and other qualifying businesses to their heirs.

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