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Tax Consequences for Heirs

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The Executor Adviser from Executor.org

The Executor Adviser is an advice column created by Executor.org for Legacy. Executor.org's experts aim to help readers with questions about executorship and provide comprehensive, free online resources to guide executors through this complex process.

It’s been said that the only two certainties in life are death and taxes. The reality is that even after death, there are often still taxes to be paid — by the estate and, potentially, by heirs.

Given that, in this month’s Executor Adviser, we’re going to broach the subject of taxes — for both the estate and heirs. The two are intertwined and can have a meaningful impact on inheritances.

I’m going to share some general guidelines here, but always encourage executors to look to an accountant for tax advice. Every situation is different, and your decisions in this area can have meaningful consequences for the estate and its heirs.

Estate Taxes
Estate taxes can be due at both the federal and state level. Fortunately, the current threshold at the federal level is very high, and 75 percent of states don’t have estate taxes, so many will not be impacted by estate taxes. If there are estate taxes to be paid, they are due within nine months of the date of death.

Income Taxes
Unfortunately, the estate is likely to owe income taxes — for one or two years. If the individual who passed had income of any kind, including investment income, federal, state, and local income tax may be due on that income. If the person died early in a calendar year, and didn’t file taxes for either year, income taxes may be due for both years.

Date of Death Valuation
Assets in an estate are valued at the date of death. What does this mean? It means that if the person who died owned stock trading at $100 per share on their date of death, even if he or she bought that stock for $10 per share, no tax will be due on the sale of that asset. If the value of that stock goes to $110 after death, tax will be due on the incremental gain. There is also a possibility to select an “alternate date” when that is favorable to an estate, but we’ll save that one for your accountant.

Assets in Retirement Accounts
Taxes are generally still due on assets sitting in retirement accounts. If you liquidate an IRA, there are likely to be taxes due. There is, however, a wonderful tool called an Inherited IRA that allows heirs to defer those taxes after inheriting an IRA, if they are eligible to take advantage of this investment product and choose to do so. Once you liquidate an IRA, you lose eligibility to roll it over into this type of account, so make sure you understand your options before doing so.

Life Insurance Proceeds
Life insurance proceeds are typically not taxable to beneficiaries. But remember, as I discussed previously in this series, you can’t assume that an insurance company will come looking for you to pay you. You need to be proactive and try to find any existing policy.

Personal Property
Assuming the estate is smaller than federal and state minimums for estate taxes, there is no tax due on the inheritance of personal property.

So here’s the bottom line. In most families, fighting during estate settlement tends to be related to financial issues. Taxes can have a meaningful impact on inheritances, so you’ve got to make this a focus area, get help from professionals as needed, and do the best job possible or you’re going to be dealing with very unhappy beneficiaries.

As you may know by now, there are, in most cases, more than 100 steps in the process in settling an estate, so the process can’t be completed overnight. And, you’ll likely have to take the estate through probate court, which typically doesn’t happen quickly. You’ll need to encourage all of the heirs to be patient as you work through the process, thoughtfully manage the tax implications related to it, and do the best job possible in the role.

And, to reinforce what I mentioned above, getting reputable professionals involved to help, is almost always a good idea to keep the process moving forward, making sure that the best decisions possible are being made.

If you’d like to learn more about your role as executor, and get a free custom plan to help you understand your responsibilities, get a digital checklist of your required tasks, and have a place to store important information to help you keep organized, please visit Executor.org. The site covers everything you’ll need to know to settle an estate as quickly and easily as possible — and gives you a proven step-by-step approach to managing this complex process.

Have a question about executorship? Get an answer by sending an email to [email protected].


About the Author: Patrick O'Brien is CEO and co-founder of Executor.org, a free, comprehensive online resource that helps executors manage their responsibilities and duties in this complex role. The free tools include a helpful step-by-step interactive guide for executors and invaluable tips on everything from planning a funeral and keeping beneficiaries happy to dealing with grief and managing estate assets.


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