Private Client Services by Mercer
An Inheritance or Estate Tax is a tax imposed on a beneficiary who has inherited money or property or a levy on the estate (money and property) of a person who has passed away.
Estate Tax and an Inheritance Tax may be compared as follows:
Estate Duty or Estate Tax is a Government Tax which arises on the demise of an individual, also known as "death tax". An Estate Duty is a tax imposed on the deceased’s estate in its entirety. The executor is responsible for paying this Estate Tax to the government. It is different from Inheritance Tax.
Similar to Estate Duty, Inheritance Tax is a Government Tax which arises on the demise of an individual. Unlike Estate Duty, an Inheritance Tax is a tax imposed on the beneficiaries who receive assets from the deceased. Each beneficiary is responsible for paying their own Inheritance Tax.
However, this distinction is not always observed; for example, the UK's "Inheritance Tax" is a tax imposed on the assets of the deceased. Strictly speaking, it is therefore an Estate Tax. For historical reasons, the term “death duty” is still used colloquially (though not legally) in the UK and some Commonwealth countries.
Purchase of a Life Insurance policy to pay some or all of the Estate Duty / Inheritance Tax , can make things easier on the deceased’s family when the need for liquidity arises. One would not be forced to sell assets in distress for the purpose of paying such taxes.
In short, it can give the insured peace of mind that he/she would not be burdening their family and friends with a hefty tax bill when the eventuality has taken place.
The process would involve an individual buying a life policy on his/her life for a face value covering the expected tax liability.
In a jurisdiction where ownership of the policy by the insured would result in proceeds of death benefit falling into his/her estate, there would be a need to consider an alternative ownership structure. Whereas, in some jurisdictions where proceeds of death benefit for a life policy are not captured by Inheritance Tax / Estate Duty, individual ownership is the most appropriate.
As estate and tax planning can be complicated, so the client is best advised to obtain independent legal and tax advice.