There are some questions that arise with regard to taxes on inheritances. In this post we will look at a basic overview.
There is such a thing as an inheritance tax per se. An inheritance tax is levied on transfers to each nonexempt person who is receiving an inheritance.
There is no inheritance tax on the federal level, but there are some states in the union that impose inheritance taxes on the state level. Our firm practices law in the state of California. Here in California there is no state level inheritance tax.
The states that do have this type of tax typically exempt certain very close relationship such as spouses, children, and parents.
You may wonder if the people on your inheritance list will be required to report the bequests as income for income tax purposes. Generally speaking, the answer is no. Inheritances are not considered to be taxable income under the tax code.
There is a caveat to the above statement. If you were to inherit assets that are subject to appreciation, the appreciation is potentially taxable.
Probate enters the picture if you use a last will to facilitate the transfer of your assets. The process of probate can be time-consuming. If assets that you inherit are going to appreciate during the probate process, that appreciation could potentially be taxable.
When you hear about an inheritance tax, you may assume that it is the same thing as an estate tax. This is not the case.
An estate tax is levied on the entirety of an estate before the assets are distributed to the heirs. As we explained in the first section, an inheritance tax is levied on each each transfer of assets to the inheritors.
There is a federal estate tax in place, and some of the states in the union impose a state-level estate tax. California does not have a state estate tax.
It is possible for a state to levy a state-level inheritance tax, and a state-level estate tax. Two states, Maryland and New Jersey, actually have both of these taxes.
When Action Is Required
When you boil it all down, the only death tax that you have to be concerned about as a California resident is the federal estate tax. (There is a federal gift tax, but that’s a topic for another post.)
The amount of the federal estate tax credit or exclusion is $5.34 million in 2014. If your assets do not exceed this amount, the estate tax will not be a factor for you and your family.
On the other hand, if your assets are in taxable territory, you must be proactive about the implementation of tax efficiency strategies. Our firm offers free consultations to people here in the greater San Jose, California area. If you would like to speak with an attorney about wealth preservation, contact us through this site to set up an appointment.