Inherited property, while often providing significant financial benefit, can present complex tax implications, and the question of avoiding double taxation is a common concern for those receiving assets from an estate. Understanding how the tax system treats inherited assets—specifically, whether they’re subject to income tax and estate tax—is crucial for effective financial planning, and avoiding unexpected liabilities. The federal estate tax and the potential for capital gains tax on inherited assets are the primary areas of concern, though many estates fall below the threshold for federal estate tax, and certain strategies can mitigate capital gains, or defer them entirely. This essay will explore those issues, and how working with an estate planning attorney like Steve Bliss can help navigate these concerns.
What is the Estate Tax and Do I Need to Worry About It?
The federal estate tax is a tax on the transfer of a deceased person’s property to their heirs. However, in 2024, the federal estate tax exemption is quite high – $13.61 million per individual, or $27.22 million per married couple. This means that unless an estate exceeds these amounts, no federal estate tax will be owed. However, it’s important to remember that some states also have their own estate or inheritance taxes, with much lower thresholds. California, for example, doesn’t have a state estate tax, but that is not universally true. “Many people mistakenly believe that if they aren’t wealthy, they don’t need to worry about estate planning, but that’s simply not true—it’s about ensuring your wishes are followed and minimizing the burden on your loved ones”, Steve Bliss often tells clients. Approximately 0.05% of estates file an estate tax return, demonstrating how few estates actually owe this tax.
How Does the “Step-Up” in Basis Work for Inherited Assets?
A crucial benefit for inherited property is the “step-up” in basis. This means that the cost basis of an inherited asset is adjusted to its fair market value on the date of the decedent’s death. This can significantly reduce or eliminate capital gains tax if the heir later sells the property. Let’s say your grandmother purchased stock for $10,000 many years ago, and at the time of her death, it was worth $100,000. If you inherit the stock and sell it immediately for $100,000, you won’t owe capital gains tax because your basis is $100,000. Without the step-up in basis, you would have been taxed on the $90,000 gain. A common issue is when beneficiaries fail to properly document the fair market value on the date of death, leading to disputes with the IRS.
I Received Rental Property – What Are the Tax Implications?
Inheriting rental property presents unique tax challenges. While the step-up in basis applies to the property itself, it doesn’t automatically erase any accrued depreciation that the decedent claimed during their ownership. This creates a situation where the heir may be required to recognize a taxable gain at the time of inheritance, known as a “phantom gain”. However, Section 1031 of the Internal Revenue Code allows for a deferral of capital gains tax if the inherited property is exchanged for “like-kind” property. I remember a client, a woman named Eleanor, inheriting a small apartment building from her father. He had meticulously documented the property’s basis and depreciation schedule, but she was still concerned about the tax implications. After working with Steve Bliss, she exchanged the apartment building for a larger commercial property, deferring the capital gains tax and creating a more substantial income stream.
What Happened When Estate Planning Was Ignored?
I once worked with a family who encountered a devastating situation after their patriarch, George, passed away without a comprehensive estate plan. George owned a successful landscaping business and several rental properties. He hadn’t updated his will in decades, and his assets were tangled in probate for years. The lack of proper documentation regarding the basis of his assets meant his heirs faced significant capital gains taxes when they finally sold the properties. They ended up losing a substantial portion of their inheritance – funds that could have provided for their future generations. The ordeal was emotionally and financially draining, and they deeply regretted not seeking legal advice earlier. It was a painful lesson in the importance of proactive estate planning.
How Did a Trust Save the Day?
Conversely, I assisted a couple, the Millers, who had established a revocable living trust years prior. When the husband, Robert, passed away, the transfer of assets to the wife, Sarah, was seamless. The trust included provisions for a professional appraisal of all assets as of the date of death, establishing the stepped-up basis. Sarah was able to sell some of the inherited assets without incurring significant capital gains tax. The process was efficient, stress-free, and saved the family a substantial amount of money. “A well-crafted trust isn’t just about avoiding probate,” Steve Bliss explains. “It’s about protecting your family and ensuring your legacy is preserved as you intended.” The Millers were grateful for the peace of mind and financial security that the trust provided.
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About Steve Bliss at Wildomar Probate Law:
“Wildomar Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Wildomar Probate Law. Our probate attorney will probate the estate. Attorney probate at Wildomar Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Wildomar Probate law will petition to open probate for you. Don’t go through a costly probate call Wildomar Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Wildomar Probate Law is a great estate lawyer. Probate Attorney to probate an estate. Wildomar Probate law probate lawyer
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
- living trust
- revocable living trust
- estate planning attorney near me
- family trust
- wills and trusts
- wills
- estate planning
Map To Steve Bliss Law in Temecula:
https://maps.app.goo.gl/RdhPJGDcMru5uP7K7
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Address:
Wildomar Probate Law36330 Hidden Springs Rd Suite E, Wildomar, CA 92595
(951)412-2800/address>
Feel free to ask Attorney Steve Bliss about: “What should I know about jointly owned property and estate planning?” Or “Can I challenge a will during probate?” or “What professionals should I consult when creating a trust? and even: “What should I avoid doing before filing for bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.