How to Ensure Your Inheritance at Tax Time
"When you inherit something, generally the cost basis of the security is equivalent to the fair-market value on the date of death," Bergman says. "In certain instances, there may be an alternate valuation date six months after the date of death, but that would be determined by the personal representative of the decedent."
Even those assets may not be the whole picture. Hobart warns that life insurance policies the heirs aren't aware of can still bump them over the limit.
"People think life insurance is tax free and that's great, but if the life insurance pays into the estate and not into an irrevocable life insurance trust, that counts toward the $5.12 million threshold," Hobart says. "Let's say that mom and dad had $1 million in assets but they went crazy and got a $9 million life insurance policy; that estate is now worth $10 million and fall under federal estate tax exemption."
Staying beneath that $5.1 million doesn't always ward off the estate tax, either. Uncle Sam may not get out of bed for less than $5.1 million, but 16 states and the District of Columbia certainly do. Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Ohio, Oregon, Rhode Island, Tennessee, Vermont and Washington all impose state estate taxes of up to 35% for those worth more than a specified amount. That ceiling is as high as the fed-matching $5.1 million in North Carolina, but dips as low as $675,000 in New Jersey or $338,333 in Ohio.That's just what gets taxed well before filing time. If an heir happens to have the distinction of living in Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania, there's an extra inheritance tax tacked on once the inheritance makes it into his or her hands. Wives of heirs are exempt from all of these taxes, as are life insurance payouts, but that's about as kind as each of these plans gets. Descendants in Indiana, Nebraska and Pennsylvania are taxed anywhere from 1% to 20% after coming into some money or property. Domestic partners in all of the above states excluding New Jersey are on the hook for inheritance taxes at those rates as well.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV