It's only punishment if you think there is a natural right to control the disposition of property after death. Otherwise, it's just a argument as to why a purely optional benefit not grounded in rights should not be extended by the state.
Not extending a benefit to which there is no entitlement is not inherently a punishment.
Countries that seize this much property don’t do too well economically.
If the children of the mom and pop shop die, and the children are preschool aged, with no other inheritors or people designated to handle the estate, then what?
Effectively no one says that "every generation must completely pull themselves up from zero".
Do you seriously think the children of working/labor class families, living in rental housing, and with no capital, completely pull themselves up from zero?
Since they don't, neither do the children you hypothesis. So what's the point of your argument other than to tug at our heartstrings about those orphans?
Oh, and if the mom and pop shop is bankrupt, or has little capital, and there isn't family or close friends able and willing to take care of the kids, then who will?
Oh, right, "some state system." So if you are so concerned about these children, perhaps we need better orphanages and better support for the foster system.
Now, how do we fund those improvements?
For the record, I don’t think the state taking away most (or all) of a person's estate after they’ve died is a punishment at all.
It punishes those who would have had the assets otherwise. Especially when the stated reason is to punish them.