Just as Haley’s Comet makes an appearance every 75 years, and Old Faithful geyser blows its top 20 times a day, we are reminded of one of life’s certainties every April 15 (May 17th this year)—taxes. Paying taxes is something all of us will do our entire lives.
When a loved one passes away, there are still some tax issues that will need to be completed. In a recent article on Legacy.com titled “Tax Consequences for Heirs,” the authors offered some general guidelines to help navigate the tax process. Because everyone’s situation is different, we always encourage you to consult with an accountant for tax advice as these decisions can have meaningful consequences for the estate and its heirs.
Estate taxes can be due at both the federal and state level. Fortunately, the current threshold at the federal level is very high, and 75 percent of states don’t have estate taxes, so many will not be impacted. If there are estate taxes to be paid, they are due within nine months of the date of death.
If the individual who passed had an income of any kind, including investment income, federal, state, and local income tax may be due on that income. If the person died early in a calendar year and didn’t file taxes for either year, income taxes may be due for both years.
Assets in Retirement Accounts
Taxes are generally still due on assets sitting in retirement accounts. If you liquidate an IRA, there are likely to be taxes that must be paid. There is, however, a tool called an Inherited IRA that allows heirs to defer those taxes after inheriting an IRA. Once you liquidate an IRA, you lose eligibility to roll it over into this type of account, so make sure you understand your options before doing so.
Life Insurance Proceeds
Life insurance proceeds are typically not taxable to beneficiaries. However, do not assume that an insurance company will come looking for you to pay you the proceeds. Keep your life insurance policy in a safe place with your other important documents, including your memorial/funeral plans and will.
Assuming the estate is smaller than federal and state minimums for estate taxes, there is no tax due on the inheritance of personal property.
Taxes can have a significant impact on inheritances. Consult with tax professionals, as needed for the best possible outcomes.