Do I Pay Taxes When I Inherit?

Capital gains taxes are then calculated, so you pay taxes only on appreciation that occurs after you inherit the property. Yahoo Finance’s recent article entitled, “Do I Pay Taxes Automatically If I Inherit Property?” says there are three main types of taxes that cover inheritances:

Inheritance taxes are taxes that an heir pays on the value of an estate that they inherit. There are no federal inheritance taxes. However, six states have an inheritance tax.
Estate taxes are taxes paid out of the estate before anyone inherits. The estate tax has a minimum threshold, and as with all other tax brackets, the government only taxes the amount that exceeds this minimum threshold, which is $12.92 million ($25.84 million per married couple).
Capital gains taxes are taxes paid on the appreciation of any assets an heir inherits through an estate. They’re only levied when you sell the assets for gain, not when you inherit.

The cash you inherit is taxed through either inheritance taxes (when applicable) or estate taxes. With inheritance taxes, you must file and pay this tax.

With an estate tax, the IRS taxes the estate directly.

Therefore, it’s uncommon for an heir to owe any taxes, including income tax, on inherited cash.

The IRS does not automatically tax any other forms of property that you might inherit. However, you’ll owe capital gains taxes if you choose to sell this property.

When you inherit property, whether real estate, securities, or almost anything else, the IRS applies a stepped-up basis to that asset. This means that for tax purposes, the base price of the asset is reset to its value on the day that you inherited it. If you inherit property and immediately sell it, you’d owe no taxes on those assets.

Two prices are involved in establishing a capital gain tax: the sale price (how much you sold the asset for) and the original cost basis (how much you bought it for).

Reference: Yahoo Finance (Aug. 27, 2023) “Do I Pay Taxes Automatically If I Inherit Property?”

Transferring Property to Heirs? Skip Top Five Mistakes

It is not difficult to ensure the smooth transfer of ownership of your property to a spouse, children, or other heirs, as long as you have an estate plan created by an experienced estate planning attorney and know what pitfalls to avoid. Most importantly, says the article “I’m a Financial Planner: Here Are 5 Mistakes You Must Avoid When Transferring Property to Heirs” from GoBankingRates, if you die without a will, your state’s intestate succession or next-of-kin laws will determine who inherits your house if yours was the only name on the deed.

Next-of-kin succession varies by state, but for the most part, the priority order is first the surviving spouse, biological and adopted children, parents, and siblings, followed by grandparents, aunts, uncles, nieces, nephews, cousins and extended family members.

You’ll want to know how your state treats intestate property to avoid unwanted surprises for your family. For instance, in some states, full siblings are prioritized over half-siblings, while in other states, they are treated equally.

The biggest mistake is dying without a will and an updated deed. In some states, the property will need to go through probate if the surviving heir is not in co-ownership of the house, regardless of what’s stated in the will.

The solution is simple. Add an adult child or the person you intend to be your executor to the property’s deed via a warranty or quit claim deed. This prevents the family home from going through probate and seamlessly transfers to the individual you want to handle your estate after you’ve passed. In particular, this should be done once one spouse in a joint-owning couple dies.

There are four general types of property ownership. The legal system treats them all differently. They are property with the right of survivorship, property held in a trust, property subject to a will and property for which the spouse does not have a will.

If two spouses purchase and jointly own a property, the right of survivorship dictates that the surviving spouse automatically receives the decedent’s half and becomes the sole owner. This is the simplest and easiest outcome, since it avoids probate and the need to alter the deed. However, it’s not always the case.

A surviving spouse might need to change their deed if a partner dies and the deed didn’t automatically transfer property after death. If only one spouse was on the deed, they may have to go through probate (if there was a will) to transfer the home into the surviving spouse’s name. The spouse may need to file a survivorship affidavit and a copy of the death certificate to ensure that the title is properly in their name.

Should you transfer property while you’re still living? It may solve some problems but create others. If a primary residence is transferred to an adult child and they sell it not as their primary residence, it could lead to a large capital gains tax bill. However, if the child inherits the property after your death, the heir will enjoy a stepped-up tax basis and avoids capital gains taxation.

Before taking any steps to arrange for the transfer of the home after passing, talk with the person or people to make sure they want it and the responsibilities associated with owning a home. This is especially true if there’s more than one heir with different opinions.

If children don’t get along or are in different financial positions, leaving one property for all of them to manage together could lead to family fights. Talk with them before putting your wishes into your estate plan to avoid unnecessary resentment and, in the worst case, litigation.

Reference: GoBankingRates (July 26, 2023) “I’m a Financial Planner: Here Are 5 Mistakes You Must Avoid When Transferring Property to Heirs”

What’s Is the Best Way to Give to Charity?

Charitable giving plays a valuable role in estate and tax planning. A well-planned donation can also provide a healthy income tax deduction, along with a reduction of estate taxes. Your generous donation could help to maintain financial security, exert control over assets during life and after death and provide for heirs, as explained in a recent article titled “Charitable giving good for heart, 1040” from the Valdosta Daily Times.

To accomplish any of these objectives, you’ll want to work with an experienced estate planning attorney who can help tailor an estate plan to your individual circumstances. Here are some strategies to consider.

Gifts of appreciated property might allow you to avoid capital gains tax owed when the asset is sold and, if planned properly, might allow you to receive an income tax deduction, usually worth the fair market value of the asset.

Removing any assets from your estate reduces the potential estate tax liability.

If you want to make a donation to a charity but you’d like to maintain some control over it, a Charitable Remainder Trust (CRT) might be a good fit. A CRT works best when funded by an appreciated asset, such as real estate or stock in a family owned business.

Once the property is transferred to the CRT, the CRT can sell the appreciated assets it holds without paying capital gains taxes. It then continues to provide income generated by the CRT to the beneficiaries for a period of time, as instructed by the CRT. At the end of this period, the remainder of the CRT is donated to the charity. You avoid capital gains on the assets you donated, an income stream and you also receive a tax deduction.

Another strategy is to use a Charitable Lead Trust or CLT. With a CLT, you give the charity the use of the asset and the right to any income generated for a predetermined time. When the time period ends, the asset reverts to you or is given to whoever you designate in the CLT. Appropriate assets for a CLT could be income-producing stocks and bonds, a valued collection or a painting transferred to a museum for a certain period of time.

You likely receive a current income tax deduction for the value to the charity. However, you receive no other direct benefit during the term. If a CLT is created upon your death, estate tax liability could be reduced.

Early tax planning can help make the most of any charitable giving opportunities and let you take full advantage of any additional benefits. Talk with an experienced estate planning attorney to receive guidance appropriate to your unique situation.

Reference: Valdosta Daily Times (Dec. 4, 2022) “Charitable giving good for heart, 1040”

How Do I Give My Children the Summer Home?

There are many ways to pass property on to children, such as gifting a home to them while you are still alive, bequeathing it to the children at your death, or selling the home to your heirs. Each has legal and tax implications, so consider the possibilities and consult with an experienced estate planning attorney.

According to USA Today’s recent article entitled “How estate planning can help you pass down a house to your kids and give them a financial leg up,” as you put a plan in place, here are three options to review.

Gifting the property to children. One idea for a landlord with rental properties is to set up a revocable trust, where a trustee is responsible for liquidating houses as they became vacant, as long as the tenants were in good standing. This type of plan is built around the idea of maximizing the value to our children as beneficiaries and minimizing the impact on the trustee, while compensating them for their troubles. In addition, there may be tax implications. When you give a house or any other capital asset to your children while you’re alive, there’s significant capital gains tax issues because of the carryover cost basis. The use of a revocable trust avoids probate. It gives the children a step-up in basis and allows them to avoid capital gains tax.

Bequeathing a house to heirs. You can gift the family home to the children while you’re still alive, bequeath it to them at your death, or sell the residence to your heirs. A will is the standard way to bequeath property to children. Parents have the ownership and benefit of the property during their lifetime and when the last parent dies, the children get the home with the stepped-up basis (the increased value of the property when it passes to the inheritors). A revocable trust is another option to bequeath property. Placing a house into a trust avoids probate court and saves on estate taxes. You can say who gets the property and set guidelines on how they get the property. If one child wants the property, for example, you can state they have to buy out the other siblings. Note that adding the children to the deed of the house means they will each own the house. Therefore, if one child wants to live in the home, the others won’t be able to sell because that child won’t be in agreement. A revocable trust can prevent this from happening.

Selling the home to the children. Selling a home to an adult child may be wise, if the parents can no longer afford to maintain the property. However, there can also be pitfalls if the agreement isn’t well thought out. Parents should think about ways to save money when selling to their children, such as deeding the property to the kids and having them refinance the property and cash the parents out. If parents sell the home below fair market value to their children, they’re restricting their ability to have a retirement. This leaves little to help with retirement, since many people don’t have pensions and are only living on Social Security. There are also taxable gains consequences, if parents sell the home for more than they paid. The sale may result in higher property taxes to the purchaser in some situations.

Reference: USA Today (Dec. 7, 2021) “How estate planning can help you pass down a house to your kids and give them a financial leg up”

Why Do People Give to Charities at End of Year?

The landscape for charitable giving has undergone a lot of change in recent years. More changes are likely around the corner. This year, a more intentional approach to year-end giving may be needed, according to the article “How to Make the most of Year-End Charitable Giving” from Wealth Management.

From the continuing pandemic to natural and humanitarian disasters, the need for relief is pressing on many sides. Donors with experience in philanthropy understand charitable giving as part of a tax strategy, part of providing the essential support needed by non-profits to keep operating and respond to emergencies and, at the same time, ensure their charitable dollars are aligned with their family values and missions.

For the tax perspective, changes resulting from the Tax Cuts and Jobs Act of 2017 left many nonprofits harshly impacted by the doubling of the standard deduction, which gave fewer people a financial incentive to donate. The question now is, could the latest round of proposed changes spur greater giving?

Amid all of these changes, sound and stable giving strategies remain the wisest option.

The CARES Act encouraged individual giving during times of hardship, and tax breaks were extended in 2021. However, certain incentives are now closing, such as the ability to deduct up to 100% of adjusted gross income for cash gifts made directly to public charities.

The Build Back Better Agenda proposes increasing the long-term capital gains tax rate for individuals with more than $400,000 of taxable income, and married couples filing jointly with more than $450,000 of taxable income, to 25%, plus a 3% surcharge to income of more than $5 million. This would make charitable giving more attractive from an income tax perspective. However, this bill has yet to be passed.

Consider the following strategies:

Qualified charitable distributions. RMDs must be taken in 2021. For donors taking a standard deduction, a qualified charitable distribution is a possible option. If you are 70½ and over, you can donate up to $100,000 from an IRA. This satisfies the RMD, as long as the gift goes directly to a charity, not to a Donor Advised Fund.

Contributions of appreciated stock. To make charitable gifts in the most tax-efficient way possible, a donation of appreciated stock is a smart move. Donors receive a charitable income tax deduction (subject to AGI limitations) and avoid capital gains tax.

Charitable bequests. The uncertainty around income tax reform includes estate taxes, and pro-active individuals are now reviewing their estate plans with their estate planning attorneys.

Funding a Donor Advised Fund (DAF). A DAF allows donors to contribute assets to a tax-free investment account, from which they can direct gifts to the charities of their choice. The contribution to the fund provides the donor with a charitable income tax deduction in the year it’s made.

Reference: Wealth Management (Oct. 11, 2021) “How to Make the most of Year-End Charitable Giving”

What Taxes are Due When Children Inherit Home?

The first issue to address is whether the will addresses how inheritance taxes will be paid, says nj.com recent article entitled “My adult kids inherited a home. What taxes are due?” The mortgage may say the estate itself will pay it before anything is paid out to beneficiaries, or it may not mention anything.

Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania are the only states that impose an inheritance tax, which is a tax on what you receive as the beneficiary of an estate.

Maryland is the one state that has both an inheritance tax and an estate tax. Its inheritance tax is up to 10%. As to the others, Nebraska’s inheritance tax can be as high as 18%. Kentucky and New Jersey both taxes inheritances at up to 16%. Iowa’s inheritance tax is up to 15%, as is Pennsylvania’s.

Spouses and certain other heirs are usually excluded by the state from paying inheritance taxes.

A child may have an issue if there’s not enough liquidity in the estate, separate from the house to pay the taxes. If the beneficiaries plan to keep the home, they’d need to take an additional mortgage. They’d also need to find enough cash to pay the inheritance taxes due.

In the example above, if the deed is transferred to a niece and nephew, the executor should hire a licensed real estate appraiser and pay for a date of death appraisal on the property. That appraisal will determine how much capital gains was exempted at the sister’s passing. It will also establish a new basis for capital gains purposes for the niece and nephew.

If the heirs simply do nothing and move into the house, the inheritance tax will come due. In New Jersey, it’s due eight months from the date of death.

If the inheritance tax isn’t paid, liability for the unpaid tax will attach to the executor personally, often in the form of a certificate of debt attached to some asset belonging to the executor, like his or her house.

To make sure this is handled correctly, consider speaking to an experienced estate planning attorney, who can walk you through the process.

Reference: nj.com (June 14, 2021) “My adult kids inherited a home. What taxes are due?”

Would Life Estate Have an Impact Taxes on an Inherited Home?

Nj.com’s recent article entitled “My mom added us to her deed and then died. Do we owe taxes?” explains that assuming mom retained an interest in the house or lived in the house after putting her children’s names on the deed, the IRS considers the property to be part of the taxable estate of the mother.

That is a critical point, when it comes to the amount of tax the children may have to pay.

She most likely kept a “life estate” in the home. This is where a person owns the property only through the duration of their lifetime. It is called “a tenant for life” or a “life tenant.”

A life estate is a restriction on the property because it prevents the beneficiary (usually the children) from selling the property that produces the income before the beneficiary’s death.

When the mom passes away, the life estate automatically stops and the children now have all of the rights associated with the property. As to income tax, when the parent dies, the property receives a “step up” in basis to the date of death value.

If the mom in our example had a life estate, the children would receive a “step up” in basis to the fair market value of the property on the date of death.

That means that the capital gain that would be taxed to the children would be the difference between the fair market value of the property when their mother died and the net proceeds of the sale.

Retaining the life estate can help a child avoid the capital gains tax more effectively than a simple transfer of the property outright to the child.

Talk to an experienced estate planning attorney about life estates and taxes, when you inherit a home.

Reference: nj.com (Feb. 18, 2021) “My mom added us to her deed and then died. Do we owe taxes?”

What are My Taxes on a House I Inherited?

Say your mom transferred the deed of the house over to you in November 2014 with a life estate for her. She dies in 2016. Mom paid about $18,000 for the home in 1960. This is the son’s primary and only residence. He wants to put the house on the market for $375,000. Will he have to pay capital gains tax?

The son probably won’t owe any tax on the sale of the house. Nj.com’s recent article entitled “Will sale of inherited home cause a tax liability?” explains that the profit can be calculated, by subtracting the cost basis from the sales price. That cost basis is the original purchase price plus any capital improvements.

As far as the son’s repairs, he should look at capital improvements, which is somewhat nebulous. The IRS definition is “add to the value of your home, prolong its useful life, or adapt it to new uses.” Any improvements must be evident when you sell. If you replace a few shingles on your roof, it is a repair. However, if you replace the whole roof, that’s a capital improvement. If you don’t have receipts for the capital improvements, you can use reasonable estimates. However, the IRS may not accept them, if you’re audited.

Inherited property receives a “step up” in cost basis to the fair market value as of the date of death. This means that the original purchase price of the property and any capital improvements prior to the date of death are no longer relevant.

If a property is sold after it is inherited, the profit is calculated by deducting the date of death value from the sales price with an adjustment for any capital improvements made to the property after the date of death.

As far as the mom’s life estate in the home, this is a special type of real estate ownership, where the owner retains the exclusive right to live in the property for as long as she’s alive. However, a remainder interest is given to someone else, like a child. This “remainderman” automatically becomes the owner of the property upon the death of the life tenant.

Even with the life estate, the home receives a full step-up in cost basis upon the death of the life estate owner. The first $250,000 of profit on the sale of a primary residence is also exempt from tax, as long as the seller owned the home and lived in the home for two out of the last five years.

As such, the basis of the home will be the fair market value of the home in 2016, when the son inherited it as the remainderman of the life estate deed, plus any capital improvements he made since then.

In this situation, because the son has owned and lived in the house for two out of the last five years, he can exclude up to $250,000 of profit. With estimated sale price of $375,000, he shouldn’t owe any capital gains tax.

Reference: nj.com (Dec. 31, 2020) “Will sale of inherited home cause a tax liability?”

Here’s Why You Need an Estate Plan

It’s always the right time to do your estate planning, but it’s most critical when you have beneficiaries who are minors or with special needs, says the Capital Press in the recent article, “Ag Finance: Why you need to do estate planning.”

While it’s likely that most adult children can work things out, even if it’s costly and time-consuming in probate, minor young children must have protections in place. Wills are frequently written, so the estate goes to the child when he reaches age 18. However, few teens can manage big property at that age. A trust can help, by directing that the property will be held for him by a trustee or executor until a set age, like 25 or 30.

Probate is the default process to administer an estate after someone’s death, when a will or other documents are presented in court and an executor is appointed to manage it. It also gives creditors a chance to present claims for money owed to them. Distribution of assets will occur only after all proper notices have been issued, and all outstanding bills have been paid.

Probate can be expensive. However, wise estate planning can help most families avoid this and ensure the transition of wealth and property in a smooth manner. Talk to an experienced estate planning attorney about establishing a trust. Farmers can name themselves as the beneficiaries during their lifetime, and instruct to whom it will pass after their death. A living trust can be amended or revoked at any time, if circumstances change.

The title of the farm is transferred to the trust with the farm’s former owner as trustee. With a trust, it makes it easier to avoid probate because nothing’s in his name, and the property can transition to the beneficiaries without having to go to court. Living trusts also help in the event of incapacity or a disease, like Alzheimer’s, to avoid conservatorship (guardianship of an adult who loses capacity). It can also help to decrease capital gains taxes, since the property transfers before their death.

If you have several children, but only two work with you on the farm, an attorney can help you with how to divide an estate that is land rich and cash poor.

Reference: Capital Press (December 20, 2018) “Ag Finance: Why you need to do estate planning”

Estate Planning Blog Articles

Estate & Business Planning Law Firm Serving the Providence & Cranston, RI Areas

Do I Pay Taxes When I Inherit?

Transferring Property to Heirs? Skip Top Five Mistakes

What’s Is the Best Way to Give to Charity?

How Do I Give My Children the Summer Home?

Why Do People Give to Charities at End of Year?

What Taxes are Due When Children Inherit Home?

Would Life Estate Have an Impact Taxes on an Inherited Home?

What are My Taxes on a House I Inherited?

Here’s Why You Need an Estate Plan

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Do I Pay Taxes When I Inherit?

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What’s Is the Best Way to Give to Charity?

How Do I Give My Children the Summer Home?

Why Do People Give to Charities at End of Year?

What Taxes are Due When Children Inherit Home?

Would Life Estate Have an Impact Taxes on an Inherited Home?

What are My Taxes on a House I Inherited?

Here’s Why You Need an Estate Plan

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