No Estate Tax for Inheritance

There are many rules and regulations involved with inheritance and deeds. People often get stuck paying a life’s worth of taxes when they receive an inheritance. Robert J. Bruss, columnist for The San Diego Union-Tribune, explains one beneficial tax break associated with inheritance in his July 23, 2006 article, “No estate tax due on inheritance.”

The article is written in a convenient question and answer format:

“Before my father died this year, he deeded his house into his living trust, in which my sister and I are successor trustees. His will stipulates that all his assets and property be divided equally among his four children (me, my sister and four brothers). We are getting the house ready to sell and expect to net more than $400,000. His original purchase price was $36,000, with no major improvements since then. Because he was single at the time of his death, does his estate owe tax on the profit exceeding $250,000?”

The $250,000 the question refers to is the “250,000 principal sales tax exemption of Internal Revenue Code 121.” The code that stipulates taxes must be paid on a $250,000 profit, applies only to home sales during the seller’s lifetime.

Bruss answered that the estate did not owe taxes on the profit because of the previously mentioned code and because the estate did not exceed the current $2 million federal estate tax exemption.

Bruss continues to explain that even though the father’s will left his estate to his four children, the living trust, which has nothing to do with the will, should specify who receives the living trust assets once he is deceased.

There may be a dependant tax on heirs, depending on the state tax where the father was a resident. “Fortunately, only a few states still have old-fashioned inheritance taxes on heirs, but there are usually generous exemptions for close relative heirs such as spouse, children and parents.”

Barring a few individual state laws, there is usually not an estate tax due on inheritance if the estate’s net worth is under $2 million.

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