When income is received from any source, you are naturally going to be concerned about taxation. This will enter the picture when it comes to estate planning, and there are some misconceptions out there. In this post, we will take a look at the subject and pass along three facts about taxation that you should understand when you enter the estate planning process.
Inheritances are not subject to regular income taxes.
If someone leaves you an inheritance through the terms of a last will, you would not be required to report it as taxable income. Insurance policy proceeds fit into this category as well. When it comes to trusts, if there are appreciable assets, the earnings would be subject to taxation. Distributions of the principal would not be taxed.
There is also a step up in basis that enters the picture if you inherit the assets that appreciated during the life of the person that passed away. This means that you not be responsible for capital gains taxes on the gains that took place during the life of the deceased individual. However, if you keep the assets, and they appreciate in the future, you would be responsible for capital gains.
There is a federal estate tax.
Though you do not have to worry about income taxes for the most part, it is important to be aware of the existence of the federal estate tax. This levy carries a maximum rate of 40%, so it is a very big deal if you are exposed. That’s the bad news, but the good news is that most people do not have to pay the tax.
There is a federal estate tax credit or exclusion. This figure represents the amount that can be transferred before the estate tax would become applicable. At the time of this writing in 2019, the federal estate tax exclusion stands at $11.4 million. There are annual adjustments to account for inflation, so you may see a somewhat larger exclusion next year.
To sum it up, the portion of your estate that exceeds $11.4 million could potentially be subject to taxation. However, there is an unlimited marital deduction. If you are married in the eyes of the law, and your spouse is an American citizen, unlimited tax-free transfers are allowed.
Plus, on the subject spouses, the estate tax exclusion is portable. This means that a surviving spouse could use the exclusion that was allotted to his or her deceased spouse.
Some states have state-level estate taxes.
There are some states in the union have state-level estate taxes, and the exclusions in these states are typically lower than the federal estate tax exclusion. As a result, you could be exposed on the state level even if you are exempt from the federal estate tax. Our practice is in Nevada, and fortunately, we do not have a state-level estate tax to contend with here in the Silver State.
Though there is no estate tax in our state, it is possible that individual that a resident’s estate could be exposed to state-level estate taxes. If you own valuable property in a state that has its own estate tax, the death levy could be applicable on the transfer after your passing.
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