By Robert J. Green
When I meet with clients to talk about their estate planning documents, the issue of taxes is always part of the discussion. Generally speaking, there are three categories of taxes with which to be concerned when planning an estate: "death" taxes, inheritance taxes, and income taxes. Let's review a bit about each.
Federal "Death" Taxes:
The "death" tax, also commonly called a "gift" tax, an "estate" tax, or a "transfer" tax, is the tax that is imposed due to the fact that one person's assets are being transferred to another person. At the federal level, there is a "unified-transfer-tax system," which means that the federal "death" tax is actually a combination of a tax on gifts given during one's life and the assets transferred at one's death. The good news (for most of us) is that this tax will not actually be incurred unless a person is transferring more than $11,180,000.00 (effectively $ 22.36 million per married couple) for estates of persons dying in 2018.
State "Death" Taxes:
Idaho no longer imposes a "death" tax (and has not since 2005). Some states, like Oregon and Washington, do have their own "death" taxes. If you own property such as real estate in one of those states that has a "death tax", your estate may have a responsibility to pay those taxes.
Federal "Inheritance" Tax:
An "inheritance" tax is typically the name given to a tax that the recipient of an inheritance must pay. Sometimes this is described as being like a sales tax for something that you did not buy (you just received it upon someone's death). The federal government does not currently impose this type of tax.
State "Inheritance" Taxes:
Idaho does not currently impose an "inheritance" tax. Some states do have their own "inheritance" taxes, and if you own property in one of those states, such as real estate, the beneficiary receiving that property upon your death may have a responsibility to pay those taxes.
State and Federal "Income" Taxes:
Generally, when someone receives an asset as an inheritance, the acquisition of that asset will not count as income. If that asset subsequently increases in value (such as real estate or an investment of any kind) or produces income (such as a rental property), the increased value or the income produced will likely be subject to income tax. Both the federal government and the state of Idaho impose income tax.
The tax rules applicable to estate plans can become complex pretty quickly. There can be many exceptions to the standard rules, and even exceptions to the exceptions. This is certainly an area in which proper planning matters, and in which it makes sense to get good advice from someone with knowledge and experience with these taxes. Dying without any estate planning documents in place (or the wrong planning in place) can result in some very unfortunate tax results.
If you do not have any legal documents in place, or are unsure whether you have everything you need, talk to a good estate planning attorney. Some law firms, like mine, will offer you a free consultation to come discuss these topics and even review any of your existing documents. Why not to take advantage of such guidance and leave nothing to chance?
This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussion of your specific circumstances.