Sonoma Sun ~ Eric Gullotta


Taxes, taxes, taxes

Posted on May 26, 2018 by Eric Gullotta

The first question most beneficiaries ask when discussing the receipt of an inheritance is, “How much do I pay in taxes?” Even while planning, people will ask a similar question, “How much tax will my beneficiaries pay?” Well, the answer to both is, it depends. Which as everyone knows is the usual answer from an attorney.

There are a couple different types of taxes; income tax, inheritance (death) tax and capital gains tax. Some or maybe all can be applicable, so let’s take a look at them.

Inheritance/Death Tax. Enacted in 1916, this tax was intended to tax the wealthy on the transfer of assets, already taxed by the way, to their heirs. Today, it seems to catch more than the wealthy has gotten much better with the passage of our most recent tax act. The tax is applicable to transfers of assets to anyone and is based on your worldwide assets. Yes, even your assets out of the US are subject to US estate taxes. With the passage of the most recent tax act, the current amount any one person can pass to their beneficiaries (doesn’t have to be heirs or family) is $11,180,000.

Alternately, a married couple can pass twice that, or $22,360,000. Anything above that is subject to a pretty serious tax rate of about 50 percent. This allows most of us to escape the tax all together and thus makes it a moot issue. This tax does not apply to charitable gifts so leaving your estate to a worthy on-profit will never result in tax.

Income Tax. Income taxes are payable on any accounts that haven’t been taxed yet. Those would be most notably your IRA (individual retirement account) or employer sponsored 401(k). As the amounts in these accounts have not yet been taxed, when they pass to your beneficiaries, they are subject to income tax. The tax is paid by the person receiving the money and based on their individual tax situation. If you are receiving a distribution from your spouse via this type of account, you’ll have the option to “roll” the distribution into an “inherited” account and let it grow until you’re required to take distributions, currently 70-½ years old.

If the person who died is anyone other than your spouse, you are required to start taking distributions immediately and the minimum distribution is based on an IRS table that says how much you’re required to take out each year. It is based on your age and is intended to have you draw out all of the money by the time you die. Of course, you can take more than the minimum but you’ll pay higher taxes. Always consult your tax advisor when receiving such distributions from a deceased person.

Finally, and less likely but still noteworthy, are capital gains or more appropriately, built-in capital gains. Typically when someone dies, you receive a “stepped up basis” for tax purposes. Your basis is the amount that is used to calculate your gain upon selling an asset. If you inherit an asset, typically your basis is the fair market value at the date of the person who died. Practically speaking this means that if you receive an asset (stock or real estate) that will be sold, you will pay little or no capital gains because the basis is essentially reset to the day the person dies and in a normal world, would be the amount you sell it for. However, sometimes assets are not subject to a stepped up basis and thus if you decide to sell, even soon after death, there will be capital gains.

These examples are far too complex this limited space, and my head hurts just writing about taxes so much already! Do I expect you to understand the tax implications from a person dying in 700 words or less? No. Of course not. But, you should be aware of the different types of tax, which assets they apply to and then hopefully you’ll consult with a tax advisor, attorney or both. Some estate plans can be structured in a way to completely eliminate income and estate taxes. This requires planning and getting good counsel — before it’s too late.


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