Can I Really Spend All My Inheritance Money, or Does Uncle Same Get a Portion?
DOESN’T MATTER IF IT COMES FROM AN ESTATE OR TRUST
Is My Inheritance Taxable – Your inheritance of money or property may come from the estate of a deceased person or from a trust established previously. These types of things are generally referred to as “bequests” or “gifts” as far as tax law is concerned. People receiving bequests or gifts are referred to as “beneficiaries”.
A gift or bequest of a specific sum of money or of specific property, which is required by the specific terms of the will or trust instrument and is properly paid or credited to a beneficiary is not treated as income to the beneficiary. Instead, it is treated as a gift under the tax laws which by definition is not reportable income.
EXCEPTION WHERE PAID IN MORE THAN THREE INSTALLMENTS
In order for a gift or bequest to be excludable from the taxable income of the recipient, the terms of the will or trust providing for the payment must not provide for payment in more than three installments. If paid in more than three installments, then complex trust taxation rules apply for determining how much of the payment is income to the recipient.
INHERITANCE PAYMENTS OFTEN INCLUDE SOME INCOME AS WELL
Because gifts or bequests are often not paid until months or sometimes a year or more after the death of the giver, there may be some taxable income included in the payment to the recipient. For example, if there is a bequest for $10,000 but it is not paid for a year and the money earns interest income of $200 in the estate, then somebody has to report the $200 of interest income. If the amount paid out is $10,200 then the recipient would end up reporting $200 of interest income on his or her tax return.
Trust and estate tax accounting can be complex so the taxable portion of any gift or bequest usually cannot be determined until the fiduciary income tax return, form 1041, is prepared for the year in question. The trustee or executor handling the trust or estate involved will need to consult with his or her tax advisors to determine what is taxable and what is not taxable. They will also need to determine if interest is payable to the beneficiaries on a gift or bequest. If a beneficiary of an estate or trust is going to have a taxable income component on what has been received then the taxable income will be stated on a schedule K-1. The schedule K-1 typically will be provided to the beneficiary before April 15 so that the beneficiary will know the amount of income to report on the beneficiary’s personal income tax return.
ESTATE TAXES TO BE CONSIDERED
If the estate is large enough to require the payment of federal estate taxes, then the amount of the gift or bequest paid out could be reduced by those types of taxes. Whether or not there is a charge of estate taxes against a gift or bequest depends in part upon the wording of the trust instrument or will involved. A deceased person’s estate or trust is subject to estate tax for any net asset value amount above $5,340,000 for persons dying in 2014. The tax is due and payable 9 months after the date of death. The tax on the amount above $5,340,000 is 40%.
CALL (949) 229-7034 to speak with Lawyer David L. Crockett
PROPERTY TAXES TO CONSIDER IF PROPERTY DISTRIBUTED
If there is a gift or bequest of property out of the estate or trust real estate taxes needs to be considered. The beneficiary would typically receive the property with the property taxes paid current. However, due to proposition 13 in California, the property could be reassessed effective as of the date of death of the giver of the property which would result in an increase in property taxes. Any beneficiary receiving property should consult with his or her tax advisors or an estate attorney to determine if there are any exemptions available from reassessment. The typical exemptions considered are the parent-child exclusion and grandparent grandchild exclusion which cover certain amounts and certain situations. These must be applied for with the taxing authorities within the legal deadlines.
Conveniently located in Newport Beach near the John Wayne Airport
We are located near the Orange County California John Wayne Airport. My office is catty-corner from Fletcher-Jones Motorcars; —right behind the rear entrance of Newport Lexus on Dove Street. Here is a picture of my office building and a Google Map to get your bearings.