Taxes and Inheritance

When someone passes on, his or her assets are typically left behind to a beneficiary. If you find yourself the recipient of money, you may have a big question on your mind: will I have to pay taxes? Before we go any further, remember this: it is a good idea to speak with an experienced and qualified estate planning attorney to ensure that you are paying all necessary taxes. Whether or not you are required to pay inheritance tax depends on how much money you are receiving, the state in which you live, and your relation to the person who passed on. You need to be fully aware of both federal and state taxes. At the federal level, there is no inheritance tax to be concerned about. That being said, there is a federal estate tax that could impact you.  However, the estate tax, if applicable, is paid by the deceased person’s estate, not by the recipient of the money.  In 2017, the amount of an estate that can generally be passed without federal estate tax concerns is over $5 million.  Fourteen states also impose an estate tax, but not California. At the state level, you may find that you have to pay inheritance tax. Currently only five states (Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) impose an inheritance tax.  Fortunately, in California, we have no inheritance taxes. Although Californians generally don’t have to worry about state estate taxes and state inheritance taxes, it does not mean you are completely out of the woods in connection with “death taxes”. Taxes may be due on money inherited through a tax-deferred retirement account or a tax-deferred annuity.  For example, if you inherit money from someone’s traditional (v. Roth) IRA, there will be income taxes due on the amount of the inherited sums. Another area of taxation may arise when someone inherits appreciated assets such as stock or real estate. If the inheritances comes through a will or trust after the death of the original owner, there is good news.  The recipient gets what is known as a “step up” in basis for tax calculating purposes which essentially means that the capital gains that accrued during the life of the original owner are forgiven.  Such is not the case when someone puts the recipient’s name on title before his or her death either by way of gift or joint tenancy. If you find yourself inheriting money from someone who has passed on, contact a qualified estate planning attorney who can review your situation and help you better understand what taxes you owe. Even if you do owe money, a professional may be able help you lower the tax bite.