Probate: Death Taxes

Upon transferring property, either through Gifts, Wills, Trusts or via probate, you or your survivors may have to pay some taxes.

The Federal Government and the State of Washington have taxes on inheritance you may have to pay.

Federal Estate Taxes

The federal government assesses a tax based upon the net value of the deceased person’s estate. For tax purposes the estate includes all property in which the deceased had an interest at death, and certain other property, such as some gifts made prior to death. The proceeds of a life insurance policy owned by the decedent are included in the net estate. A federal estate tax return must be filed only if the total value of the deceased person’s net estate exceeds the applicable exclusion amount, which changes periodically. When a federal estate tax return is filed, the value of most property that passes to a surviving spouse is deducted from the value of the estate-known as the “marital deduction,” therefore reducing the taxable estate. In 2013, the amount of the unified credit is $5,250,000.00, in 2014 it increases to $5,340,000.00, in 2015 it increases to $5,430,000.00, and in 2016 it increases to $5,450,000.00. If your estate is under this amount, you will most likely not owe any federal estate tax.

A basic table with federal estate tax exclusionary amounts for each year shown follows. If your net estate assets are less than the amount shown for a given year, you are likely free from Estate Tax.

WARNING! Be sure to consult a tax attorney before filing income taxes in a year where you may inherit property.

The unlimited marital deduction only “defers” the estate tax; it does not eliminate it. Upon the surviving spouse’s death an estate tax may be due if the estate exceeds the applicable exclusion amount. In determining the value of the estate, only half of the value of community property is included, while all of the separate property is included. For married people, avoidance or reduction of inheritance taxes by preservation of the unified credit must occur while both parties are alive.

Washington Estate Tax

Washington state imposes a tax on the decedent’s estate. For deaths after 2006, the threshold for filing is a gross estate of $2,000,000.00. If an estate is required to file a federal estate tax return, then it is also required to file a Washington Estate Tax Return. If no federal estate tax is due, then no Washington estate tax is due either.

Income Tax

Because an estate is a separate taxpaying entity, federal income tax may be due from the date of death until the date all distributions are made from the estate. The Personal Representative of the estate may be responsible for filing a “Fiduciary Income Tax Return” (Form 1041) depending on the amount of income the estate receives from its assets before distributions are made.

LIFETIME GIFTS

You have the option of giving your property away in the form of gifts. This option may save you money in taxes, and it may give you greater control over how your property is distributed. Particularly with regard to children, it is a great way to save money for college. You may also wish to put money into a trust account so your children will have financial resources in the event of your death. You may give up to $10,000 per recipient per year without having to report the gift. Gifts in excess of this amount may require a gift tax filing and will shrink your lifetime exemption which will impact inheritance tax. Gifts also can trigger other federal and state consequences such as ineligibility for state assisted medical or nursing home care.

Spousal gifts

These are gifts you give to your spouse. In making these gifts, you pay no income, gift, or estate tax. Spousal gifts in community property states may be given on a stepped-up basis with sufficient time. Gifts can equalize estates.

Children

You can give your children gifts in order to lower your taxable estate. Gifts to children are free of Federal Estate Tax within certain limits. Gifts of up to $14,000 per child are exempt from estate tax. The limit is $28,000 if given from both husband and wife, with spousal consent to split gifts of separate property. Gifts of tuition or health care expenses are exempt from $14,000 limit. Giving gifts to your children can serve as an additional source of income through the appreciation in value of any assets.

You can also give children gifts in order to fund their education. There have been recent changes in Federal Tax Laws regarding long-term funding of educational benefits. Benefit has been eliminated under new tax law as to certain children. Watch out for kiddy tax!