Wouldn’t it be exciting to find out that you are about to inherit from your great uncle’s estate? Then it crosses your mind – do beneficiaries pay inheritance tax? Well, every estate is required to pay taxes to the government, but is an heir required to pay taxes on money received from a will? The answer depends on where you live. California does not impose an inheritance tax. However, there are some exceptions to this general rule, in California, that you should be familiar with. Also, state laws change frequently, so you should always contact your state tax agency if you are receiving an inheritance to make sure you know the current rules.
What is inheritance tax?
When a beneficiary receives money or assets from someone’s estate, a tax known as an “inheritance tax” is imposed on that money. The federal government does not impose an inheritance tax, but some states do. Depending on the class of beneficiary, the rate of inheritance tax that is applied will be different. For example, a surviving spouse and lineal heirs (those descending from a common ancestor like children and grandchildren), are taxed at a lower rate than distant relatives or unrelated beneficiaries. Spouses and lineal heirs may be totally exempt from inheritance tax. Not all states still impose inheritance taxes. Luckily, California does not.
Inheritance tax vs. Estate tax
The difference between inheritance tax and estate tax is who pays the tax. A tax imposed on your right to transfer property to others upon your death is called an “estate tax.” This type of tax is calculated after making an accounting of the assets you own, or in which you have a certain type of ownership interest. The total value of these assets is referred to as your “gross estate.” Property and assets included in your gross estate include cash, securities, insurance proceeds, real estate, annuities, trusts, and business interests. Once applicable deductions are allowed, the net amount is known as your “taxable estate.” It is this amount on which estate tax is assessed. So the estate tax is imposed on the person leaving the property, instead of the person receiving it.
Do I pay taxes on a gift from someone who is still alive?
Some clients wonder if they have to pay taxes on a gift they receive from someone who is still living. The general rule is that the person giving the gift is responsible for paying the taxes on that gift and reporting it to the IRS and their state, if required. The receiver typically does not have any immediate tax consequences. There may be future tax consequences, for instance, when the gifted property is sold.
If you have questions regarding inheritance taxes, or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.