When an individual passes away, their assets and estate may be subject to taxation in theory. However, in practice, most estates are too small to be subject to federal estate tax. Under current laws, only estates valued at $11.58 million or more are required to pay taxes. Additionally, many states do not have estate or inheritance taxes. If your estate is subject to taxes, someone must prepare, file, and sign the estate tax return. The responsibility for paying the tax bill falls on the beneficiary, personal representative, or successor trustee, depending on various factors related to probate.
Understanding Tax Responsibilities in Probate
If your estate goes through probate, the executor or personal representative is responsible for using estate funds to pay taxes. They must prepare and file all necessary tax returns with state tax authorities and the IRS. Let’s delve into the different types of taxes in more detail.
Estate Taxes Explained
Estate taxes are based on the current market value of assets, not their original purchase price. This means that any appreciation in asset value is subject to tax, but it also means that any decrease in value can result in tax savings. If a surviving spouse is part of the estate, the total amount is not calculated, and the estate is not subject to tax. The unlimited marital deduction allows spouses to transfer assets to each other tax-free. However, beneficiaries may be subject to estate taxes if the estate exceeds the limit after the surviving spouse passes away.
Federal Estate Taxes and Probate
According to current regulations, estates with gross assets exceeding $11.58 million are subject to federal estate taxes.
State Estate Taxes
Residents of states with estate taxes are more likely to face state tax obligations than federal estate taxes. State estate tax exemptions are generally lower than federal exemptions, often as low as $1 million. Estate taxes are levied by the state where the deceased resided at the time of death.
State Inheritance Taxes
While there is no federal inheritance tax, some states (such as Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania) impose taxes on assets inherited from deceased individuals. The taxation and rates depend on the value of the inheritance, the relationship to the deceased, and the laws of the state. Life insurance proceeds designated to a specific beneficiary are typically not subject to inheritance tax, but proceeds payable to the deceased or their estate may be taxed.
Similar to estate tax, inheritance tax is only applicable to amounts exceeding the exemption. Tax rates are usually on a sliding scale, starting in single digits and increasing to 15-18%. The exemption and tax rate may vary based on the relationship to the deceased, rather than the value of the assets inherited.
Key Takeaway
Understanding the tax implications during probate is crucial. While most assets are not taxable during this process, it is important to report any cash inheritance received. Rent from a property is taxable, not the property itself. Having a clear understanding of tax details is essential, and this article serves as a comprehensive guide for navigating the complexities of estate taxes.
If you are facing probate, consider hiring a knowledgeable lawyer to assist you through the process and ensure a successful outcome.
