Receiving a gift from an estate is one of those double-edged sword moments. On the one hand, the gift may be desperately needed or may have great sentimental value. On the other hand, if the gift came from an estate it means that the gift’s owner died. Along with the emotional turmoil that often comes with being named as a beneficiary of an estate there are likely some legal and practical issues you need to sort out. One question we often hear is “Do I pay taxes when someone leaves me money?” Although taxes are a concern when someone dies, the beneficiaries or heirs of the estate do not typically need to worry about any immediate tax liabilities.
As a general rule, any tax due on a gift is paid by the donor. The parties may agree that the recipient will pay the tax but that only occurs in rare cases. The way gifts are taxed at the federal level is through the federal gift and estate tax. When you die, the total value of your estate assets is added to the total value of all qualifying gifts made during your lifetime. That figure is then subject to gift and estate taxes at a maximum rate of 40 percent. There are a number of strategies that can be used to reduce an estate’s exposure to estate taxes, starting with the lifetime exclusion amount. Each taxpayer may deduct up to the lifetime exclusion limit before estate taxes are levied on the estate. As of 2014, the lifetime exclusion limit is $5.34 million.
Though the recipient of an inheritance or gift is not required to pay taxes at the federal level some states have an inheritance tax. Missouri is not one of those states. You could, however, end up paying capital gains tax on an inheritance down the road. Capital gains tax is the tax levied on the gain realized upon the sale of real property. If you are required to use the decedent’s basis for the property you could end up owing a considerable amount in capital gains tax. If, on the other hand, you are allowed to use the fair market value at the time of the decedent’s death when calculating capital gains you will pay far less in capital gains tax.
If you have questions regarding a how a specific gift will impact you financially, consult with your estate planning attorney.