Inheritances are great for the next generation, but they can complicate taxes. How can you avoid that? How can you leave a legacy to your family without also leaving a large tax burden for your children and grandchildren?
The Estate Planning lawyers at The Siegel Law Group can assist. We’ve helped hundreds of people get their affairs in order, bringing them peace of mind in the years ahead.
What Taxes Might Beneficiaries Have to Pay on Their Inheritance?
Depending on the amount of the estate and other aspects of your particular situation, an inheritance might be subject to estate tax, inheritance tax, and/or capital gains tax.
The federal estate tax is based on the current fair market value of the estate. In 2022, only estates worth a minimum of $12.06 million will be subject to the tax. When an estate does have to pay federal estate tax, the tax rate is 18% to 40% of the assets over the $12.06 million threshold.
There is, however, an exception for spouses. If your spouse inherits your estate, they won’t have to pay federal estate taxes even if the estate is over the threshold. Florida does not have a state estate tax, but several other states do. In those states, some people may have to pay estate taxes to their state even if they are not required to pay federal estate taxes.
The inheritance tax is not the same thing as the estate tax. The inheritance tax is paid by beneficiaries, while the estate tax is taken directly from the estate. Also, unlike the estate tax, which can be a federal and/or state tax, the inheritance tax is strictly a state tax. Inheritance tax rates vary depending on the state and the value of the inheritance. Florida does not have an inheritance tax, but six other states do.
Capital Gains Tax
If your beneficiaries inherit property and/or investments, they pay capital gains tax at the time they sell it. The tax is calculated on a “step up basis,” which means that the market value of the property is calculated as its value at the time they inherit it, not its value at the time you originally bought the property.
What is Capital Gains Tax?
Cash is the only asset that your beneficiaries have to report for taxes right away. If they inherit homes, other types of real estate, stocks, bonds, mutual funds, or other investment property, they don’t have to pay taxes on them until they sell them.
The capital gains tax applies to the profit that someone makes on a property or an investment. Usually, in a non-inheritance situation, the tax applies to the difference between the price you paid for the item and the price you receive when it’s sold.
With inherited property, the cost basis is “stepped up” to the time your beneficiaries inherit the property. This can save them a lot of money in taxes.
Example: Say you bought your home for $50,000, lived in it for decades, and at the time you pass away, it’s worth $200,000. Your beneficiary sells it two years later when its worth has risen to $220,000.
Without the advantage of the stepped-up cost basis, your beneficiary would owe capital gains tax on the difference between $220,000 and $50,000, which equals $170,000. With the stepped-up basis, they’ll owe capital gains tax only on the $20,000 difference between the property’s value at the time they inherited it and its value at the time it was sold.
How an Estate Planning Attorney Can Help
An experienced estate planning attorney can look at your assets as a whole and create a comprehensive plan to protect your family members from tax burdens. A personalized estate plan may include trusts where you can control your property without ownership and other legal instruments to ensure a smooth distribution of your assets.
You don’t have to experience the stress of trying to figure this out on your own and worrying that a loved one will be burdened by their inheritance. Contact The Siegel Law Group to speak to a licensed Estate Planning attorney who will guide you through the process and minimize the taxes on your estate.