ESTATE TAXES – A QUICK OVERVIEW
There are a few states that levy taxes on the estate of the deceased, generally referred to as the inheritance tax or the death tax.
Florida does not have a separate state inheritance tax. Even further, heirs and beneficiaries in Florida do not pay income tax on any monies received from an estate because the inherited property does not count as income for Federal income tax purposes (and Florida does not have a separate income tax).
Example: Mother dies and leaves you a home worth $250,000. The receipt of the home is not income to you for income tax purposes. Inherited assets are simply not a part of the income tax system.
However, there are some tax rules that you should be aware of.
Federal Estate TaxesAs previously mentioned, Florida does not have a separate inheritance tax. The federal government, however, imposes an estate tax that applies to all United States Citizens. The federal estate tax only applies if the value of the entire estate exceeds $12,060,000 million (2022), and the tax that’s incurred is paid out of the estate/trust rather than by the beneficiaries. With the estate tax level so high (which doubles to $24.12 million for amarried couple), very few people/estates need to worry about the federal estate tax.
Potential Tax Concerns for InheritancesAs mentioned, the estate tax is only an issue for people dying with over $12.06 million (2021). The individual heirs are generally not responsible for the taxes as the duty to collect and pay the estate tax is the responsibility of the Executor or successor Trustee.
Some other situations in which Florida beneficiaries may have to pay some form of taxeson inheritances include:
- Withdrawing funds from retirement accounts. While taxes don’t apply to the inheritance or transfer of an IRA, 401K, annuity, or other qualified plans, income taxes can be levied when the monies from these accounts are withdrawn upon the account holder’s death. The reasoning is that since the deceased person would have been liable for taxation on withdrawal, the beneficiary is also liable for those income taxes. In addition, benefits received from some pension plans and investment accounts may be taxable. It’s a good idea to speak with an attorney or accountant before you draw any money out of these types of accounts upon the death of a loved one. Note that withdrawals from Roth IRAs are not taxed when someone dies.
- Receiving income from the estate. If a beneficiary receives property that generates income, there may be a tax on the income received before the property is transferred. For example, if the deceased owned an apartment building and the tenants paid rent to the beneficiaries during the probate or trust settlement period, then the heirs may have to pay income tax on the rental income.
- The inheritance itself is not income. While the estate may earn income during the settlement timeframe, the receipt of the inheritance is not taxed to a beneficiary. For instance, your mother leaves you $20,000 in life insurance. The $20,000 is not taxable income to you. If, however, the life insurance had income before it was distributed out, the income on the policy would be taxed to the beneficiary. Any income is likely minimal if a policy is claimed quickly.
- Selling inherited assets. As mentioned, income taxes don’t apply to property received directly from an estate or trust. However, if you sell property that you inherited, the funds you receive may be subject to federal income tax if the asset has gone up in value after the decedent’s passing. For example, if you inherit stock worth $20 on the date of death and sell it for $25, you would have to pay income tax on the $5 gain. If you held the property for one year after the death, the gain in the property may be a capital gain. The good thing is that income tax would only be based upon the increase in the property’s value from the date of the decedent’s death if any. The inheritance itself is not income to you.
- Inheriting from a non-U.S. citizen. There may be tax complications if the deceased person is not a United States citizen, or if one of the beneficiaries is not a United States citizen. If a person is not a permanent resident of the United States but owns property in Florida, the property may be taxed upon death—and spouses who are non-citizens may not be able to inherit tax-free.
Probate is not part of the Estate Tax SchemeMany people confuse the probate process with the federal estate tax. When someone dies with assets in their own, individual name, the probate process is used to settle the decedent’s estate by paying any remaining bills and distributing assets to the heirs.
What is Probate?Probate is the process of distributing estate assets to the beneficiaries after making sure the decedent’s bills are taken care of. When someone in Florida dies with assets in their own, individual name, the assets must go through probate.
Is now the time to think about your own estate plan?Yes! Create your own estate plan so that your wishes are followed and things are easier for your family. Call (305)661-7000, now.al agreement which can help navigate asset division should a divorce occur. The only other way you can protect your inheritance, making sure you are allowed to retain an inheritance in the event of a divorce, is to diligently avoid commingling it with other assets. This means you should always keep your inheritance completely separate from your marital assets. Avoid adding your spouse’s name to a bank account holding money you received from an inheritance, or adding your spouse’s name to the property you received from an inheritance. If you plan on making improvements to an asset received as an inheritance, be aware that if you use marital funds to make those improvements, your spouse may be entitled to at least a portion of the inheritance. If you have already engaged in commingling your inheritance while married, there are specific methods to track contributions, determining what portion of the inheritance is now marital and what portion remains your separate property-or, whether or not it was merely a loan that was repaid evidenced by a written agreement.
