When someone dies, one of the first things that always comes up is money. How is the funeral going to be paid for? What about their past debt? But, after all is said and done, the will is read, and some of your family may get different items, including money and gifts. The IRS has rules in place regarding estates, gifts and taxes.
What most people don’t realize is that estate taxes and inheritance taxes can come into play. What are these? Here’s a closer look:
- Estate tax is taxes that are imposed upon the deceased’s estate after everything has been distributed. It includes all of the assets, items, and property owned upon a person’s death. These things are assessed at Fair Market Value and then taxed. This tax is in place so that the things owned by the deceased can be distributed after death through use of a will. Some laws differ by state. It usually only applies if the taxable estate is over a certain cash amount as determined by local and federal government.
- Inheritance tax is paid by those who are left the items through use of the deceased’s will. Spouses are exempt, but children and other people have to pay a certain percentage depending on where you live. Some states exempt minors from this.
Now, some people, especially if they have a large estate or terminal illness, will instead choose to gift instead of allowing their assets to be inherited. Financially, this is a good move. Many people have stories of terminally ill family members who decided to gift a significant amount of money to their children before passing away instead of having their children pay the inheritance tax the following year. You can give up to $11,000 a year before getting taxed with it, so keep that in mind if you have a large estate as well.