What type of tax is levied on the estate of a deceased person before assets are distributed to heirs?

The estate tax is a tax imposed on the total value of a deceased person's estate before it is distributed to the heirs. This tax is calculated based on the fair market value of the assets owned by the deceased at the time of their death, minus any allowable deductions, such as debts and expenses related to the estate. The estate tax is designed to tax the transfer of wealth and typically only applies to estates that exceed a certain value threshold, which can vary by jurisdiction.

By taxing the estate rather than the individuals inheriting the assets, the estate tax reflects the government's aim to collect revenue from the transfer of wealth rather than from the individuals who receive it. This is a distinctive feature of the estate tax compared to other types of taxes, such as property tax, which is based on the ownership of real estate; federal tax, which typically refers to income tax obligations; or capital gains tax, which is imposed on the profit from the sale of assets.

Understanding how the estate tax operates is essential for financial planning and for those involved in estate management and inheritance processes.