Friday, March 09, 2012

Reviewing the whole topic of estate taxes

If “you” are in the process of inheriting from an estate(s), taxes can indeed become complicated.
Things that can matter are the year of death, the year of distribution (because distribution often happens months to years after death, as probate or trust liabilities must settle first).  One could get distributions or income from more than one estate in a given year; or vice, versa (more common) a single estate has multiple beneficiaries.

The best reference that I could find on the whole subject is at Martindale, here. has a reference that can be useful, and discusses the “generationg skipping transfer tax”, here.   Ehow has a reference that explains that the “estate tax” concept applies to the estate before wealth is transferred to beneficiaries, here.

There was a “threat” that the older death tax could return (as the “death tax” protections were set to expire after 2010) to 2001 levels, with estate taxes of 55% over the value of 1 million.  As most people heard, Congress “extended” the estate tax “exemptions” (to use the term loosely), in such a way that for people who die in 2010 or 2011, the base exemption is $5 million (for a person, $10 million for a married couple). In fact, for 2010 there is a technical “deferral” which probably doesn’t often work to the advantage of most people (Martindale explains it). 

Without there could be serious problems for a single person “inheriting” the estate.  Suppose the person has moved back “home” for eldercare reasons.  The parent dies at the end of 2010.  Suppose the house is in a metropolitan area (like DC) where assessed property values haven’t fallen much (compared to many areas affected by the mortgage crisis).  Even if the property is paid off, if it has a high assessed value, the 55% old tax rate could have applied on much of it.  That could force the single person to sell it anyway to recover the money and find another place to live, before taking distribution. Now there is a public policy question: many the aim of it is to get bigger, more valuable properties into the hands of younger “families” anyway.  Keeping a higher death tax could have served that purpose, even if social conservatives are known for trying to preserve generational wealth.

Wikipedia has a summary article on the Estate Tax in the US with important tables (as based on date of death) here.

If you have income from a trust before it is distributed to you, then you get a form K-1 (or 1041, here), which tells you how much additional amount to report on various items (both income and possible gains, losses and deductions) of the various 1040 sections. 

Khan Academy has this primer:

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