Questions about Death and Taxes
I’m not rich. Do I have to worry about federal estate taxes?
Under current law, your estate isn’t liable for federal estate taxation unless it exceeds a certain amount. For married couples the threshold is different. In deciding what your estate is worth, the IRS generally uses the fair market value of property you own at your death, not what you originally paid for it. In many cases, especially if you’ve owned your home, stocks, or other assets for many years, the appreciation in value of large assets could put you over the federal estate taxation limit. Assets subject to tax at death may include the family home, the family farm, life insurance, household furnishings, benefits under employee benefit plans, and other items that produce no lifetime income. In short, you may be richer than you think.
What should I do if I may be liable for the estate tax?
Although the federal estate tax misses most people, those it hits, it hits hard. If you are in jeopardy of exceeding the threshold, see your lawyer for some tax-planning advice.
Warning: Tax laws change frequently. Be sure to review your estate plan periodically.
What about state death taxes?
What is taxed and at what rate depends on state law, not only of the state in which you live but also the state where the property is located. Unless your state has an inheritance tax, your beneficiaries don’t pay tax when they receive money or other property from your estate. But they will have to pay income tax on any earnings after they invest the bequest. In addition, death itself may produce numerous tax consequences, including taxes on insurance (if paid to the estate) and employee benefits.
What if I receive a bequest and don’t want it?
Because of taxes or other reasons, those named as beneficiaries in a will or trust document may not want the property left to them. For example, if you go bankrupt and then your father dies, your creditors may be entitled to the first shot at the property he left to you. You might want to give up this property so that it will go, for example, to your sister instead of to your creditors. Or you may receive property that is subject to liens and mortgages greater than its market value, so it is a burden you would rather not have. Most states permit beneficiaries to disclaim (that is, refuse) an inheritance or benefit. The Internal Revenue Code describes how a beneficiary may disclaim an interest in an estate for estate-tax purposes. See a knowledgeable tax lawyer if you intend to disclaim any gift.