Legal Definitions - collateral-inheritance tax

A collateral-inheritance tax is a state-imposed tax on assets inherited by individuals who are not direct lineal descendants of the deceased. This tax applies specifically when the heir is a "collateral" relative, such as a sibling, aunt, or nephew, or in some cases, a non-relative.

A collateral-inheritance tax is a type of tax imposed by a government on assets or property inherited by individuals who are not direct lineal descendants (like children or grandchildren), direct lineal ascendants (like parents or grandparents), or the surviving spouse of the deceased. Instead, this tax applies when the inheritance goes to "collateral" relatives, such as siblings, aunts, uncles, nieces, nephews, or cousins, or sometimes even to unrelated individuals, depending on the specific laws of the jurisdiction. The tax rate for collateral heirs is often higher than the rates applied to direct heirs or spouses.

• Example 1: Inheritance by a Sibling

  Imagine that John passes away, leaving his entire estate, including his house and investments, to his sister, Sarah. In a jurisdiction that imposes a collateral-inheritance tax, Sarah's inheritance would be subject to this specific tax because she is John's sister, making her a collateral relative rather than a direct descendant, ascendant, or spouse.

• Example 2: Inheritance by a Niece

  Consider Maria, who was unmarried and had no children. She leaves her valuable antique furniture collection to her beloved niece, Elena. Since Elena is Maria's niece, she is considered a collateral heir. If the jurisdiction where Maria resided has a collateral-inheritance tax, Elena would likely have to pay this tax on the value of the inherited furniture collection, potentially at a higher rate than if she were Maria's child.

• Example 3: Inheritance by Cousins through Intestacy

  Suppose David dies without a will, and his closest living relatives are his two cousins, Mark and Lisa. According to the state's intestacy laws (rules for distributing property when someone dies without a will), his estate is divided equally between them. Mark and Lisa, as David's cousins, are considered collateral relatives. Consequently, their share of David's inheritance would be subject to a collateral-inheritance tax in states where such a tax is levied, highlighting the legal distinction between direct and indirect familial relationships for tax purposes.