View Full Version : Inheritance and taxes
My mom passed away last week. My sister is executor of the will. I'm concerned about how the IRS determines whether income is from an estate or simply a gift. Shouldn't there be something to indicate the money is from an estate? My sister closed out the joint account she had with my mother, deposited the money into her account, (because the bank would not issue checks to each of us siblings), and then wrote checks to all of us. I told her that I thought gifts over a certain amount were taxable, (and I thought it was the giver who was responsible for the tax).
My sister is fair and trustworthy, but I'm not sure she knows what she is doing as executor of the will, but she feels it is straightforward enough that she doesn't need to consult with a lawyer or an accountant. Most of the rest of the estate is in CD's and other bank accounts, but I have a feeling my sister will handle it the same way she did the joint account -- deposit the cd's in her account when they come due and then write checks to us. Maybe that is the right way to do things and I'm just being paranoid. It's a difficult enough time as it is. She went to register the will with probate yesterday, so maybe they will have a pamphlet or something to guide her in her role.
Anyone with any experience in this?
Edited to add: I'm saving scans of the checks just to have my own personal record of where the money came from in case I'm ever audited.
ApatheticNoMore
2-22-12, 6:03pm
Red flags went up: talk to an accountant! This stuff can be tricky from what I've heard about inheritances.
And I think it is the receiver not giver of money who is responsible for the taxes (although it is true under a certain amount - used to be 10k I think, gifts weren't taxable). Hopefully someone on the board more knowledgable than me chimes in - mostly I'd just warn that your family should stop making any moves with this money until they understand the tax implications.
Paul,
First of all, my sincere condolences. It's not an easy time, and money definitely does not make it easier.
My MIL passed away a year and a half ago. What I learned is (and there will be MANY people on this board more knowledgeable than I--I can only give you MY experience).. it depends on the State. Every state has it's own rules, but in general, if you mother didn't leave a lot, it's a piece of cake. You have to find out how much is taxable in your state.
You should really get an attorney, especially since there are others involved. In our case, my BIL was the executor--not a great choice because he's not really savvy about worldy things AT ALL. We had to hold his hand through every step. But at the end of the day, it was no big deal to register everything with the county clerk and finalize stuff. We used a lawyer, but we could have done it ourselves.
I think technically, your sister is right and I'm sure you're not going to hear from the IRS (as long as the estate is relatively small)--but still, I'd talk to a professional just to put your mind at ease. Or at very least, google your State's estate laws.
On my own end, I plan simply to type everything into Turbo Tax next spring and do what the software tells me to do regarding my own state. My main concern is how I (and my sister) document that it is from an estate in case I'm ever audited. My mother lived in another state than I do.
It is a fairly small estate, but I think it will at least cover paying off the remaining $90,000 on my mortgage, which is what I plan to do with it. I'd be excited about that if the money was coming from any other source.
An inheritance is not taxable to the recipient unless it is a distributed account like a 401K and I would have to look that one up. Even property distributed causes no taxes to the recipient but there is a new basis or cost for later sales.
Gifts are transfers while the person is alive.
That said, the estate could have state liabilities(small estate unlikely to have much for Federal.) So it is wise for your sister to protect herself and get some basic legal advice.
From what I've been able to find online, inheritance of less than $5,000,000 is not taxable, and it does not even look like there's a place to report it in Turbotax. If I'm reading the New Mexico code right, I don't have to claim inheritance unless I have to claim it on the federal level too --
Residents and nonresidents of New Mexico are subject to the Estate Tax Act, Section 7-7-1 et seq. NMSA 1978. If there is a federal requirement to file a federal estate tax return, the estate’s personal representative must file a return with the Taxation and Revenue Department (TRD). The state filing must be completed on or before the deadline for the federal estate tax return, a copy of which must accompany the state filing.
Of course I may be wrong, but that's to the best of my understanding.
I'm still concerned that my sister is dumping the estate into her checking account to distribute it to us. Wouldn't that make it look like she's liable for the gift tax? But she told me that she's not worried about it when I mentioned it to her, and she is definitely not going to call in an accountant or lawyer. I come from a very stubborn family.
I would not worry about it. It is easy to trace and show where and why the money was distributed. The IRS has way bigger fish to fry.
Plus, it is your sister's responsibility as executor.
Your sister will need to file a final federal (and state, if applicable) tax return for your mom next year. I hope she held back enough to pay any taxes due, if any.
If your mom was old enough to get Social Security payments, they need to be notified also.
It's too late but your sister could have opened a checking account for "the estate of ..." and paid final bills, done disbursements, etc from there. Final taxes could have also been paid from there. The account is closed once all monies have been used up or disbursed.
My sympathies for your loss.
jennipurrr
2-23-12, 9:45am
I'm sorry to hear about your mother's passing. I don't know the details of your relationship, but I would think paying off your mortgage would be a great way to honor her memory.
As states, every state is different, and in general the estate tax is for really really big estates (changes often but always in the millions). I believe if you have the copies of the checks and documentation that the money was from the estate and then dispersed among the heirs I don't think you will have any problems should you have to justify it. The chain of this money seems very clear even to someone who is not an accountant.
This is not relevant - no one would come after you for the gift tax on this money, but the $13,000 is annual per person, so technically if it ever came down to it, between you, wife and the 2 kids you are already up to $52,000 per year from your sister as a gift with no taxes. Also, your sister would responsible for the tax.
Paul - if it hasn't been said here yet, there is a difference between probating an estate and inhereitence - they are two different things.
Probate is the court process that settles the deceased estate (pays off creditors, taxes, leins, medical bills, etc...) and determine who gets anything left over according to the will or "line of succession" if there is no will. It is very complicated with lots of legal requirements. Inhereitence is just how and to who the assets are distributed.
Unless your Mom had everything in a Trust or had everything she owned in something that can by-pass probate - things that name a beneficary like life insurance policies, IRAs, 401ks, joint bank accounts, etc.. - then you may have to go thru probate court proceedings BEFORE any assets she had can be distributed to the heirs. Assets that don't have to go thru probate, like I listed above, can generally be given directly to the heirs. The feds don't tax inheritence but your state may - or you Mom's state may if different from yours. So that is something you'll have to check out. Calif, the state I was both an estate executor and heir to my Mom's small estate, doesn't tax inheritence either. Or life insurance policies, etc... However, IRAs and 401K's and pensions ARE taxed by both the feds and most states when withdrawn (and many MUST be withdrawn as they can't always be rolled over to the heirs) if they are in tax deferred things. If they aren't tax deferred - like Roth IRAs - then they are not considered taxable income". So even if some assets can by-pass probate, you still may have to pay some income tax on them if they are tax deferred things. But usually money from regular banks accounts, house sale proceeds (which must go thru probate and they establish a new "tax basis" (i.e. house value) to determine any capital gains or l;osses when you sell the house), life insurance, etc... are not taxable. And an estate it self is not taxable unless it over several million dollars.
As for determining if you have to go thru probate or not will depend on your Moms state. The laws and procedures to probate an estate are different in each state. Check out Nolo presses book "How to Probate an Estate" which gives basic info for all states. In Calif , you have to go thru probabte if you have total probatable assets (some assets can by-pass probate) over $100K in non-real estate assets, or real estate assets of over $20K. You have to go thru the probate court process BEFORE you inherete anything - again, unless your Mom had a Trust or had everything she owned in some sort of joint account or had a named beneficary. Those things can by-pass the probate and be distributed directly to the beneficaries. So legally, if your Moms estate DOES end up needing to go through probate, your sister is NOT legally entitled to distribute any of you Moms probatable assets until after probate closes and she gets a court order . That can take months - even years - and is best to have a lawyer handle it if possible. They usually take a percentage of the total probatable estate.
As for the money your sister had in a joint account with your Mom that she already divided up, it would be considered a "gift" from her to you and, depending on the amount you got, may be taxable. You are allowed to give/get $13,000/year tax free. However, gift taxes don't have to be actually paid until they accumulate to 1 million dollars. If the amount you got from sis was over $13K, then you (or sis) just need to fill out a very simple gift tax form to enclose with your taxes but not pay anything. But before she raids the other bank accounts or assets, you best tell to make sure she doesn't have to go thru probate first. The NOLO press book are great for that info and you can get them at the library or online. NOLO Press has info specificly for New Mexico. And, interestly, it's one of the few states that allow direct "transfer-on-death" of real estate property (I think Oregon is the only other one). So if your Mom has real estate there and filled out a form to transfer property upon her death, then her real estate doesn't have to go thru probate.
Inheritance is not INCOME taxable. Individual states may levy an inheritance tax. google your state and 'inheritance tax'
Inheritance is not INCOME taxable. Individual states may levy an inheritance tax. google your state and 'inheritance tax'
Although if inheriting a tax deferred 401K or trad. IRA and cashing it out (which may be required) you will have a taxable income. Most IRAs , etc... can't be rolled over except between spouses, so non-spousal heirs (the kids in Paul's case) have to either withdraw it all at once or get the "annuatized annual payments over a lifetime". The amount that they get either all at once or over their lifetime each year - which will be based on their age and life expectancy - will be subject to both state and fed income taxes.
Paul, while I don't know anything about inheritence taxes, I just wanted to offer my condolences to you. I'm so sorry that you've lost your mother and wish there was something I could say to offer you stregnth and comfort at this difficult time.
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