The question of taxation is naturally going to come to your mind when you are devising an estate planning strategy. Your heirs will be receiving windfalls of property, so you could assume that they would be forced to report the inheritances when they file their annual income tax returns.
When it comes to the subject of taxation, there is usually not very much good news to pass along to people who want to maintain control of their resources. In this case, there is an exception. An inheritance is not considered to be taxable income, so there would be no need to report the inheritances.
There is also the matter of capital gains taxes, and there is good news to report on this score as well. You are probably aware of the fact that the capital gains tax is applicable when a gain is realized. When you sell an appreciated asset and take possession of the proceeds, you are realizing a gain.
Inherited appreciated assets get a step up in basis. This means that the value of the inherited asset for capital gains purposes would be equal to the value at the time of the inheritance. The inheritor would not be taxed on the gains that took place during the life of the decedent.
We have shared all of the good news to this point, now we are forced to head over to the other side of the spectrum. Though you do not have to pay income taxes on an inheritance, and you get a step up in basis on appreciated assets, the federal estate tax can be a factor for high net worth individuals.
Unlimited transfers between citizen spouses are allowed, but transfers to others are potentially subject to this death tax. There is a federal estate tax exclusion of $5.43 million. The portion of any estate that is being transferred that exceeds this amount could be subject to the estate tax and its 40 percent top rate.
There are 15 states in the union that impose state-level estate taxes. We practice law in the state of Texas, and there is no estate tax in our state. You could however face state-level estate tax exposure if you are the owner of property that is located in a state with a state-level estate tax.
Position Your Assets Wisely
You should understand all the facts and position your assets in the most intelligent manner possible when you are devising your inheritance plan. If you take the right steps, you can maximize your resources and leave behind a suitable legacy for your loved ones to draw from after you are gone.
Our firm can help if you would like to explore your options. Simply send us a brief message through this link to set up a no obligation consultation: Dallas TX Estate Planning Attorneys.