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Taxation of Estates and Inheritances: The Basics

Posted by Mark Ruiz | Sep 21, 2020 | 0 Comments

When people come to my office to create a Will or Living Trust they often ask me if when they pass away whether or not their Beneficiaries will have to pay any taxes on their inheritance.  I also get this question frequently from Beneficiaries.  The answer to this question generally depends on the Net Worth of the individual at the time of their passing.  If at the time of your passing, your net worth is $11.58 Million (as of 2020), your Estate will not owe any taxes.  Additionally, when a person passes away, their surviving spouse can elect to apply the deceased spouse's unused Estate tax exemption which has the effect of doubling the exemption for a married couple to almost $23 Million. In order to make this election known as the Portability election form 706 must be filed with the IRS within 9 months of the passing of the deceased spouse.

So, in general there will not be any Estate taxes if your net worth is less than $11 Million.  That said, even if the Estate is worth less than the exempt amount, there may still be some taxes on the income derived from Assets from the Estate.  For example, if a Trust owns real property, the Estate generally have to pay taxes on rent derived from the Real Property.  If an Estate owns stock, the Estate will have to pay income on the capital gains of the stock from the time of the liquidation of the asset to the time of liquidation if the Stock increased in value. In addition to paying taxes in on income derived from Estate Assets, any individual taxes owed by the person who passed away typically must be filed and pay paid by the Estate.

Beneficiaries often ask me if they will have to pay taxes on their distribution from the Trust or Estate and the answer to that question is generally no.  Generally, distributions from Trusts or Estates to Beneficiaries are not taxable.  However, if a Beneficiary inherits an asset that has appreciated since the time of the decedent's passing, the Beneficiary may have to pay taxes on the appreciation from the Asset.

It is important to note that there is a "Sunset" regarding the Estate Tax exemption.  Specifically, in 2025 it is possible, absent further legislation, that the individual Estate tax exemption will revert back to the pre-2018 exemption of $5 million for an individual taxpayer.  

If you have specific questions about the Taxation aspects of your Estate or your Inheritance it is imperative to speak with an accountant or attorney well versed in Estate Tax Law.  I usually don't provide Tax advice directly to my Estate Planning clients  (other than high level advise) but do work with Tax Attorneys and Accountants who can advise my clients on this aspect of their Estate.



This article is intended for general information purposes only.  Any legal analysis or other content should not be construed as legal or professional advice or substitute for such advice.  No attorney-client or confidential relationship is formed by transmission of information.  If you require legal or professional advice, please contact an attorney or other suitable professional advisor.  The choice of an attorney or other professional is an important decision and should not be based solely upon advertisements and blog postings.


About the Author

Mark Ruiz

Mark A. Ruiz Attorney/Owner Mark  primarily focuses on Business Law, Real Estate Law and Estate Planning.  He holds a Bachelors Degree from Santa Clara University with an emphasis in Business/Marketing and a Law Degree from the University of San Francisco with a Business Law Certificate.  He ...


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