You may be concerned about taxes that your loved ones may have to pay when they receive their inheritances. We will examine some taxes that can come into play, but first, we should look at regular income taxes.
There is usually very little good news to pass along with regard to taxation, but this case is an exception. In fact, an inheritance is not considered to be taxable income, so your loved ones would not have to report their inheritances when they file their returns.
Plus, appreciated assets that are passed along at death get a step-up in basis for capital gains purposes. An inheritor who inherits appreciated assets would not be required to pay capital gains taxes on the gains that took place during the life of the decedent.
Going forward, the capital gains tax could come into play if the assets continued to appreciate and the inheritor was to realize a gain.
Though income taxes will not be a problem, the federal estate tax can be applied on large asset transfers. There is an unlimited marital deduction that you can use to transfer unlimited assets to a citizen spouse tax-free, but other transfers could be subject to taxation.
Fortunately, most people are not required to pay the federal estate tax, because it is only applied on transfers that exceed a certain amount. This line in the sand as it were is called the federal estate tax exclusion or credit.
Back in 2011, a $5 million credit was established, and this figure was retained after the enactment of the American Taxpayer Relief Act of 2012. However, it is inflation-adjusted, so for the rest of 2015, the exact amount of the federal estate tax exclusion stands at $5.43 million. In 2016, the figure will be $5.45 million due to an automatic inflation adjustment.
There are some states in the union that impose state-level estate taxes, and in these states, the exclusions are typically lower than the federal exclusion. As a result, a person who is exempt on the federal level could face exposure on the state level.
The second piece of good news that we can report is that there is no state-level estate tax in California, where we practice law. However, if you own valuable property in a state that does have its own estate tax, the tax in that state could potentially be applicable when the property is transferred after your passing.
Your estate plan should be custom crafted to suit your unique situation. Taxation won’t a big issue for most people, but there are other intricacies that you should be aware of when you are devising your plan.
Our firm can help if you are ready to take action. If you would like to set up a consultation, send us a message through this page: Sacramento CA Estate Planning Attorneys.